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Facebook Inc. Pays $2 Billion for… a Virtual Reality Company?

By Daniel Sparks - Mar 26, 2014 at 8:00PM

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Facebook bets $2 billion that virtual reality could emerge as the next social and communications platform. Is Facebook spending too lavishly on speculative acquisitions?

Facebook ( FB 2.40% ) announced on Tuesday that it would be paying up billions of dollars in yet another acquisition. It will buy Oculus VR for approximately $2 billion -- $400 million in cash, and the rest in stock. The agreement also arranged $300 million in incentives in the form of cash and stock for certain milestones.

What does the company do? It designs virtual reality technology. While there are certainly potential synergies Facebook may achieve with Oculus, should investors be worried about Facebook's shameless approach to paying up billions on speculative acquisitions?

Zuckerberg's reasoning
Today, Oculus is working on bringing to market its Oculus Rift virtual reality headset. The goggles allow individuals to experience an immersive computer-generated environment.

The Rift. Oculus' virtual reality goggles allow you to "seamlessly look around the virtual world just as you would in real life," the company's website asserts. Image source: Oculus website.

Zuckerberg was apparently taken aback by how real the experience feels: "The incredible thing about the technology is that you feel like you're actually present in another place with other people. People who try it say it's different from anything they've ever experienced in their lives," he said in a post on Facebook.

But where are the potential synergies for the two companies? While the goggles are focused on gaming today, there are broader applications for Oculus' virtual reality technology -- at least according to Zuckerberg.

After games, we're going to make Oculus a platform for many other experiences. Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home. ... One day, we believe this kind of immersive, augmented reality will become a part of daily life for billions of people.

My imagination is failing me, Mark. Aren't we connected enough?

Despite my personal objections, Zuckerberg says this kind of immersive, augmented reality will eventually "become a part of daily life for billions of people." In the company's press release detailing the acquisition, Zuckerberg even said virtual reality has the potential to emerge as the "next social and communications platform."

The Rift. Image source: Oculus.

Too speculative?
I wouldn't be surprised if I'm underestimating Oculus. But $2 billion is a big sum to pay, especially after the company just spent announced a deal valued at around $19 billion (about of tenth of its market capitalization) to buy WhatsApp, a messaging app with an estimated $20 million in revenue in 2013. Even Apple, with its $158.8 billion cash hoard, has never spent more than $500 million to acquire a company.

Sure, Oculus is already seeing some success with its Rift headset, having received more than 75,000 orders for development kits. But, as Zuckerberg admits, much of the reason for the acquisition was based on some bold forward-looking predictions about the future. And no matter how smart Zuckerberg is, no one has a crystal ball. Even Zuckerberg is prone to misunderstanding the future.

If Facebook continues to spend so lavishly on speculative acquisitions, there could be risk for investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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