Facebook’s Strategic Acquisition Weakness

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By Jacob Maslow

whatsapp on mobile
WhatsApp on Android mobile

One of the most common temptations of a public technology company that is worth billions of dollars is to spend your cash like a drunken sailor. The best example of this, of course, is Yahoo (NASDAQ:YHOO). Back during the first Dot Com craze, Yahoo made a name for itself for buying all sorts of companies regardless of profitability or realistic success prospects. Worst of all, Yahoo would buy these companies for huge valuations. Yahoo would lay out millions of dollars for companies that are not even close to being worth all that money.

This is what happens when you have stock-induced cash value. Since your stock is worth so much money, you can look at it as a giant bank account that you can draw on at anytime. The worst example of this was when Yahoo bought out GeoCities. GeoCities was a website that allowed anybody to create their own free website. Back in those days, hosting was very expensive.

Well, GeoCities no longer became viable as time went by, because the price of hosting crashed. In fact, you could put up a website using HostGator and dozens of other cheap hosting companies for very little money. Not surprisingly, GeoCities has shut down – all those billions “with a capital B” spent, and Yahoo has little to show for it.

This is the danger that Facebook’s (NASDAQ:FB) strategic acquisitions face. Whether we are looking at Facebook’s acquisition of Instagram or WhatsApp, it seems that Facebook’s guiding principle might lead to its undoing. What is pushing Facebook to buy these startup companies that don’t make any money? Facebook is buying market share. Put more simply, Facebook is buying relevance.

It is clear that Facebook CEO Mark Zuckerberg is not dumb. He knows that he is in a consumer space where tastes change very quickly. That is how technology trends come and go. He knows he has to move quickly, or else Facebook might be left behind. While traffic is great, he is buying market relevance.

The good news is that Facebook’s purchase of Instagram is a stroke of genius. Instagram continues to be popular and continues to grow. The picture is less clear on Facebook’s multibillion dollar deal for WhatsApp, a popular messaging mobile application. I suspect a key motivation for Zuckerberg’s acquisition of WhatsApp has more to do with Facebook trying to gain Wall Street credibility as a mobile player. WhatsApp seems like a fad, and so many other apps are doing what WhatsApp is doing. Will this gambit for mobile relevance pay off? That is the open question for Facebook shareholders and analysts.





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