It was actually back in 2007 that Facebook made its first acquisition. It was a small deal and the goal was to snag some rock-star programmers. Since then, Facebook’s M&A playbook has remained fairly consistent. And it has worked quite well. The deals have helped with important Facebook features like Places and the iPhone app.
But with Facebook’s valuation now roughly $70 billion, the company may be rethinking its strategy. That is, it could be ready for transformative deals.
In fact, this strategy has helped other Internet powerhouses. Just look at Google (NASDAQ: GOOG), which has had successful deals for companies like YouTube.
So what might Facebook buy? The buzz is that it is seriously looking at Skype, which is a leading Internet-based communications firm. Actually, the company has been in registration for an IPO, but it has languished. Perhaps a big reason was the change of its CEO.
Keep in mind that Skype has had a checkered history with M&A. In late 2005, eBay (NASDAQ: EBAY) shelled out a whopping $3.1 billion for the company. However, there were few synergies and the asset was eventually spun-off in 2009 to an investor group.
As for a deal with Facebook, the buzz is that it could be for $3 billion to $4 billion. While this sounds high, it is actually a reasonable valuation. Last year, the company posted revenue of $859 million and the growth rate continues to be strong.
The user base is also highly engaged. In 2010, they made about 207 billion minutes of voice and video calls. So by combining this level of communication with the social networking prowess of Facebook, the result could be quite interesting. It even would provide Facebook with a nice footprint on users’ desktops since Skype has a downloadable client.
Skype will also provide experience on how to convert free users to paid users. Even though Facebook is generating substantial advertising-based revenue, the company also needs to find ways to boost premium offerings.
Sure, it is far from clear whether there will be a Facebook-Skype merger. For one thing, it also looks like Google is interested in a deal, even though it already has a strong voice offering. Then again, a deal may be a defensive way to keep the asset away from Facebook.
Despite all this, such rumors will certainly become more and more common. If Facebook wants to be an Internet power, it will need to get much more aggressive with its acquisitions.
Tom Taulli’s latest book is ”All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
