Why Facebook Loves Acquiring Small Businesses

Learn why Facebook has been buying so many small businesses recently, and which start-ups the company might want to acquire in 2014.

Jan 15, 2014 at 10:00PM

When it comes to acquiring start-ups, few tech companies are more active than Yahoo! (NASDAQ:YHOO), which has acquired more than 20 companies since Marissa Mayer became CEO. A strategic acquisition policy has allowed Yahoo! to become famous in the industry for owning a wide portfolio of valuable Internet assets, from an attractive stake in Alibaba's Taobao to microblogging network Tumblr.

Facebook (NASDAQ:FB) could be as hungry as Yahoo! for promising tech companies. It seems the social network company is going to be very busy acquiring start-ups this year. In the past two weeks, the company acquired Little Eye Labs, an Indian start-up that develops software for analyzing the performance of Android apps, and social conversation firm Branch Media, a company that develops apps for public and private link-sharing, and which received seed money from Twitter co-founders Biz Stone and Evan Williams. Why is Facebook acquiring these start-ups? 

It's all about talent
Most of Facebook's recent acquisitions have been small. For example, according to The Verge, the price for Branch Media was $15 million. According to TechCrunch, the deal for Little Eyes Labs is in the range of $10 million-$15 million. Moreover, in both cases, the start-ups' teams will join Facebook.

These facts suggest that Facebook, like Yahoo!, is buying promising companies as a way of headhunting talent. In the case of Yahoo!, most of the mobile apps the company acquired last year have been shut down, and their engineering teams put to work advancing Yahoo!'s proprietary apps instead. Facebook seems to be using a similar approach: find start-ups with niche technologies that improve, or expand upon, an existing Facebook feature, acquire them, and absorb their engineering teams.

For example, Facebook will likely use Branch Media to improve its conversations feature. Branch Media developed Branch, a service that allows consumers to capture anything from the web and initiate conversations related to the subject captured. Not surprisingly, Branch Media's team may be forming a new conversations group with intentions of expanding Branch to accommodate Facebook's scale, according to co-founder Josh Miller.

Paid tools for developers
Companies also use acquisitions to enter new markets and establish new business units. In this context, Facebook may be using acquisitions to get into the business of developing paid tools for mobile app developers, a market that could be worth as much as $100 billion by 2015, according to Research2Guidance. This is a great area for Facebook, as paid tools and digital ads -- Facebook's main revenue source -- could be sold as a bundle.

Facebook's interest in this area became obvious after the company revealed it had acquired Parse in April 2013. Parse was a start-up that provided cloud-based back-end tools for mobile developers. Thanks to Parse's data storage and software development kit solutions, developers did not need to concern themselves with complex details regarding infrastructure, engagement, or server maintenance. Interestingly, unlike most of the start-ups it acquired, Facebook did not shut down Parse.

The recent acquisition of Little Eyes Labs confirms Facebook's interest in selling tools to developers, as Little Eyes Labs offered performance analysis and monitoring tools for identifying and fixing performance problems in Android applications. In this way, Facebook could eventually control every major step in the production and release cycle of apps: development, advertising, and analytics. 

In search of a game-changer
Sometimes, an acquisition can be a game-changer, as was the case of YouTube. Google (NASDAQ:GOOGL) acquired YouTube for $1.65 billion in an all-stock deal in 2009. The high premium, the fact that Google had its own video sharing site, and YouTube's small size (the company only had 65 employees) were enough to raise many eyebrows. In the end, this deal turned was extremely successful. YouTube may have channeled $5.6 billion in revenue in 2013. 

As a younger company, Facebook may still have plenty of things to learn from Google and Yahoo! when it comes to acquisitions. However, the company's wide vision, and management's commitment to innovation and expansion, suggest Facebook may eventually write its own ticket to the moon.

Final Foolish takeaway
Facebook is using acquisitions to absorb promising talent, acquire niche technology that can be used to improve existing features, and enter new markets. The social network company could also end up buying a genuine game-changer, just like Google did with YouTube. Overall, the company's acquisition policy shows strategic thinking and should be followed closely due to its long-run implications.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook, Twitter, and Yahoo!. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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