Facebook Risks Becoming Another Desperate ‘Serial Acquirer’

by Jeff Reeves | May 30, 2012 6:00 am

Wall Street is littered with the carcasses of busted buyouts, and one of my favorite stocks to kick around for its poor acquisition history is Hewlett-Packard (NYSE:HPQ[1]). In a recent article, I recapped how just nine HP buyouts since 2006 have totaled more than $40 billion[2] — and how the current market cap of the company is only $45 billion!

Of course, HP isn’t alone. Many cash-rich tech companies throw their money around, doing deals like they are going out of style. Take Google (NASDAQ:GOOG[3]), which acquired 27 companies in calendar year 2011 despite CEO Larry page claiming he is doing a “clean-up” of the cumbersome list of projects and divisions[4] in Mountain View.

But lest you think that HP or Google have the market cornered on the acquisition front, there is a new dealmaker in tech that isn’t afraid to spend like mad. And it’s none other than the new kid on the block, Facebook (NASDAQ:FB[5]).

In April, Facebook dropped a cool $1 billion to purchase photo-sharing service Instagram. The price tag was big, but the move turned heads for other reasons. First, forget profits — Instagram didn’t even have any revenues at the time of purchase. Second, it had a mere 13 employees and an age of less than two years. Third, Facebook soon announced an in-house Instagram-like program[6] called simply “Camera” to compete with the newly purchased photo sharing service.

Is your head raw from scratching yet?

Well, forget about Instagram for a moment and now consider that while this was the biggest splash, there have been other buyout ripples by Facebook in the last year.

Since 2011, FB has purchased a number of mobile companies, including app developers Snaptu and Strobe along with ads shop Rel8tion. And now there are rumors that Facebook is about to pony up another $1 billion to buy the Opera web browser[7].

This spate of acquisitions and price tags with nine zeroes behind them should be setting off warning bells on Wall Street. Facebook is looking dangerously close to being another unfocused tech shop on a buying spree.

Some might say Facebook is at least focused on its blind spot by sucking up companies in the mobile space. As any investor worth his salt should know, the biggest risk to Facebook is the move to mobile[8], where the company faces a tougher time monetizing users.

But some big problems must be acknowledged:

1. Facebook doesn’t have a huge war chest, comparatively: I’m talking about a fund the size of Google or a Hewlett-Packard here, which I have used as examples. GOOG has almost $50 billion in cash and short-term investments even after a steady drumbeat of 20 to 30 acquisitions annually, and HPQ has $8 billion despite more than $40 billion spent on buyouts in the past seven years. Facebook has only $4 billion — and that’s before any deal to buy Opera.

2. Facebook is amid a PR nightmare right now: Those of you who think that Facebook is firmly focused on the long term even as the stock has crashed 24% since its IPO a mere two weeks ago … wake up. It is trying to pull out of a tailspin at all costs after an overhyped offering that has led to an endless assault by the media[9]. The company is eager to change the conversation, and a buyout headline that’s forward-looking is a hell of a lot better than a headline about how FB is the worst IPO in a decade[10].

3. Facebook risks delusions of grandeur: Yes, FB is the dominant force in social media … for now. But many dominant companies have been doomed by hubris, fooling themselves into thinking they can succeed at anything because they succeeded in something completely unrelated. There are reports emerging about talk of a Facebook phone by 2013[11] — a ridiculous proposition if ever I have heard one.

Sony (NYSE:SNE[12]) tried a PlayStation phone[13] because people play games on their gadgets, and that flopped miserably. Chipmaker Intel (NASDAQ:INTC[14]) is racing to produce its own handsets[15]. Microsoft (NASDAQ:MSFT[16]) continues to throw money down a well with its Windows Phone OS. If Facebook spends billions of dollars to gain late access to this already crowded field that still is dominated by the Apple (NASDAQ:AAPL[17]) iPhone … well, let’s just say Zuckerberg will be sweating in his hoodie.

It’s too soon to tell whether the Opera deal is sealed, whether Facebook is truly gunning for a spot in the hardware game or whether this young company is doomed to be a serial acquirer.

But consider this above all else: It’s not just the price tag that matters, but what MBAs call “opportunity cost.” Yes, HP paid $1.2 billion for Palm in 2010 only to write down $3.3 billion late last year[18], kill its mobile device line and make the intellectual property open source[19]. However, the most damning thing of all was that Hewlett-Packard wasted those two years — and now is even further behind as the tech sector has evolved.

In short, the time wasted on Palm could have been spent on doing something — anything — else. Instead, the company lost two years with nothing to show for it.

If Facebook fails to grow or craft a strategic vision, who knows what will come along in the time it spends flailing around with hardware and acquisitions.

After all, a little company called MySpace was dominant for a while before something better came along.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[20] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves owned a position in AAPL but none of the other stocks mentioned here.

Endnotes:
  1. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  2. just nine HP buyouts since 2006 have totaled more than $40 billion: http://investorplace.com/2012/05/hpq-a-tech-dinosaur-fooling-nobody/
  3. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  4. “clean-up” of the cumbersome list of projects and divisions: http://investorplace.com/2012/04/larry-page-sums-up-a-year-as-google-ceo/
  5. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  6. Instagram-like program: http://investorplace.com/ipo-playbook/facebook-launches-an-instagram-rival/
  7. buy the Opera web browser: http://investorplace.com/ipo-playbook/facebook-another-billion-dollar-buy/
  8. the biggest risk to Facebook is the move to mobile: http://investorplace.com/ipo-playbook/the-good-and-the-bad-of-facebooks-mobile-business/
  9. endless assault by the media: http://investorplace.com/ipo-playbook/where-does-facebook-go-after-the-faceplant/
  10. FB is the worst IPO in a decade: http://www.businessweek.com/videos/2012-05-25/facebooks-ipo-flop-is-decades-worst
  11. Facebook phone by 2013: http://www.latimes.com/business/technology/la-fi-tn-facebook-smartphon-20120528,0,6443287.story
  12. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  13. PlayStation phone: http://investorplace.com/2010/11/sony-ericsson-hints-at-playstation-phone-debut-in-february/
  14. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  15. racing to produce its own handsets: http://investorplace.com/2012/04/intel-expects-to-be-big-player-in-phones-in-5-years/
  16. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  17. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  18. write down $3.3 billion late last year: http://investorplace.com/2012/05/hewlett-packard-hpq-latest-turnaround-doomed-to-fail/2/
  19. make the intellectual property open source: http://investorplace.com/2012/01/hps-webos-giving-it-away/
  20. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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