Facebook's planned initial public offering (IPO) is on track to raise $10 billion. The company earned almost $4 billion in revenue in 2011, with $1 billion in net income. With that much cash on hand, it will make sense that Facebook will start looking for opportunities to acquire other startups that can help it expand even further.
What companies would make sense for Facebook to add to its portfolio? At the end of 2011, Facebook acquired Gowalla, a location-sharing service. The acquisition was primarily intended to bring in its engineers and developers, rather than acquire the app itself. Facebook has a history of buying companies for the talented developers behind them and then killing off the actual startup. This trend changed, however, when Facebook purchased Instagram, a free-to-use smart phone photo application, for $1 billion earlier this month, with the intention of letting it be managed independent of the social media giant.
There are a variety of opportunities sitting in front of Facebook right now, both in terms of bringing in new talent through acquisitions, as well as adding new technology to its platform.
One of the more appealing purchases Facebook might consider is Skype. In fact, Facebook's own video chat product is already powered by Skype. It might be a tough deal to close, because Facebook would need to purchase Skype from Microsoft, which in turn acquired the company in 2011 for $8.5 billion. An alternative acquisition to bolster Facebook's real time communication tools would be Twilio, a startup that offers infrastructure for both voice and text messaging apps. As a bonus, the company comes with a founding team with the type of talent Facebook likes to acquire.
Facebook worked hard to promote its local deals service and its check-in platform. However, the competition in that market is tough and when Facebook couldn't stand out, it shuttered its service. Foursquare and Groupon are both well-known competitors. That said, LivingSocial provides a more attractive acquisition opportunity for Facebook. LivingSocial has been focusing on innovation and differentiating from its Groupon peer in attracting national brands. The startup is evolving faster than its counterpart is, and could offer Facebook exactly the "in" it needs into offering local services.
There have been several attempts by businesses to figure out how to sell through Facebook. After all, if their customer base is on the site, it makes sense to offer them a way to buy directly, without having to exit Facebook. However, success has been very mixed. Part of the reason is that Facebook doesn't have a robust e-commerce platform; buying Shopify could solve that problem. The startup has made a name for itself offering user-friendly shopping carts and stores; a new seller can be up and running in a matter of moments. It would be difficult to integrate Shopify into Facebook in its current form, but this is a case where Facebook's strategy of buying startups for the talent could work well.
In order to continue its impressive growth curve, Facebook is going to need to target opportunities outside the U.S. Buying talent isn't as useful for moving into new markets as it is for picking up new technology. However, Facebook can buy its way into Asian markets (as well as other areas) by acquiring one of the social networks that dominates those markets. Mixi, a Japanese social networking site, offers a clear opportunity to move into that market. It would require a different approach than Facebook's usual style of acquisition - with millions of its own users, Mixi is a valuable property in its own right. It doesn't make sense for Facebook to try to eliminate the incumbent.
The Bottom Line
In 2011, Facebook spent $68 million in cash and stock on acquiring twenty companies. In 2012, with the funds raised from an IPO available, Facebook will have even more opportunities to acquire startups. The company may not go on a spending spree, but Facebook will likely pick up more talent and tools to help in its continuing growth.