Why the Days of Facebook “Acqhires” May Be Numbered

A year ago in this space, I suggested that Facebook begin “supersizing” its acquisition strategy and move beyond its historically small, talent-driven acquisitions and into bigger buys that could move it beyond display advertising and into faster-growing revenue sectors, including search.

As we know now, Facebook clearly had a different idea, absorbing roughly 20 nascent startups in 2011, many of them “acqhires” involving few people.

Expect that to change once Facebook goes public this spring.

What gives me the courage to make yet another prediction about Facebook’s plans? Facebook has to feed “the Beast” – Wall Street, that is. “I don’t think Facebook has a choice,” says Sam Hamadeh, chief executive of PrivCo, a firm that follows privately held companies. “Facebook’s top-line growth is impressive but slowing. It’s not in the position to be complacent.”

A Facebook spokesman declined to comment for this article, citing the company’s quiet period.

There are plenty of companies that Facebook could acquire to speed its growth. The question is where Facebook should start shopping once it collects the roughly $9 billion it will have on hand following its IPO. (Facebook is currently sitting on $3.96 billion; it plans to raise another $5 billion in the offering.)

Many expect Facebook to address its greatest weakness first  — mobile. As the company itself states in its S-1, it doesn’t currently “generate any meaningful revenue from the use of Facebook mobile products. Accordingly,” states the S-1, “if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers…our revenue and financial results may be negatively affected.”

“Ad technologies, particularly in the mobile space, are the most obvious places where I think Facebook will be making targeted acquisitions,” says Dana Stalder, a general partner at Matrix Partners in Silicon Valley who focuses on both consumer and enterprise software and services. “While Facebook accounts for a huge share of display advertising inventory, its technology stack is not nearly as advanced as what Google and even Yahoo has available for advertisers.”

On the mobile ad tech side, adds Stalder, “monetization of mobile users is both Facebook’s greatest threat and opportunity, and it’s also a place where they trail the likes of Google from a technical capability.”

Oakland, Calif.-based digital media analyst Greg Sterling, thinks one play in particular might be to acquire three-year-old Foursquare, which began partnering with daily deals companies last year and that Facebook reportedly courted in the spring of 2010, before Foursquare had raised its now $71.4 million in venture funding. Says Sterling: “If Facebook is really serious about mobile advertising, it needs to confront the phenomenon of deals and offers again in a more serious way, because those are among the highest categories in terms of consumer demand.”

Another opportunity centers around Facebook’s virtual currency Credits, which allows Facebook to extract a 30 percent “tax” on virtual goods purchases made on its platform. Credits accounted for roughly 15 percent of Facebook’s overall revenue last year, bringing in $557 million. But numerous people I’ve spoken with envision Credits growing to account for a third of Facebook’s revenue, including Sterling, who suggests that one way to make it happen is through acquiring related loyalty companies. There aren’t a lot of them yet, notes Sterling, though a smaller, representative startup might be Plink, which offers people Credits to eat at Quiznos, for example.

For his part, Hamedeh thinks Facebook might first consider acquiring anything “with any hint of taking off” and “doing to Facebook what Facebook did to MySpace.” And right now, that means defensively acquiring fast-growing social networks Tumblr or Pinterest (or both), “before Google or AOL or Yahoo do it.” (Facebook, which has historically succeeded in stomping out startups with early traction by acquiring and shutting them down, “was kind of behind the curve with those two,” he adds.)

Hamadeh would also like to see Facebook acquire Twitter, despite that Facebook would likely have to pay through the nose for the company, as well as endure possible antitrust concerns. That’s saying nothing of the fact that Twitter, still struggling to produce meaningful revenue, wouldn’t necessarily add to Facebook’s top-line growth any time soon.

“Twitter would be the biggest one to swallow,” acknowledges Hamadeh. “But [Facebook’s COO] Sheryl Sandberg came from Google, which buys companies all the time. Facebook’s CFO [David Ebersman] came from Genentech, which buys companies all the time.”

Says Hamadeh: “Facebook can do a lot with the team they have in place, and I expect by summer, we’ll start seeing some bigger acquisitions. I don’t think they can do much now, in the middle of an IPO. But after May [when the company is expected to be out], all bets are off.”

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