Strategic Acquisitions

According to Bloomberg, of the tech giants, Facebook has one of the smallest percentages (23.2%) of cash hidden or held overseas. Sitting on $32.3B, Facebook has a bit of a war chest.

I’d argue for spending a large portion to build the future of the business.

Hey, Zuck, here is who to buy and why.

Note: Given Facebook’s massive user base and ease of rollout, they have a lot of quality options. Also note that these are in no particular order.

E-commerce

Facebook has played around with e-commerce and local marketplaces since October of 2015. To date, they have achieved nothing of import.

At this point, Facebook needs to either get serious or give up. Both are acceptable, though I’d argue getting serious and acquiring a player in the space could supercharge their efforts and provide healthy diversification for their business.

And with the global e-commerce market forecasted to exceed $4.47T by 2021, this could represent a new, lucrative non-advertising-based vertical for Facebook to sink its claws in.

There are a few options here, with the most important criteria being to avoid direct competition with Amazon at all costs.

Two particularly interesting businesses for Facebook to acquire are Shopify and Etsy.

1. Shopify is the anti-Amazon, the standalone platform that e-commerce businesses are built on. And while the $11.4B would be a big bet for Facebook, Shopify is the #2 e-commerce solution worldwide, powering over 500,000 merchants and around the globe. With 100,000 merchants in 2014, Shopify already spanned 150 countries. I can only imagine that number has grown, giving Facebook an e-commerce entry into virtually the entire world.

2. Etsy (market cap $2.38B) is an established, growing handmade craft and design marketplace with 1.9 million active sellers, 31.7 million active buyers, and over 45 million products on the site. In contrast, Amazon is almost 100% manufactured products and thus a very different segment of the market for both buyers and sellers.

Acquiring either could have profound impacts for both Facebook and the acquiree. In addition to making it much easier for Shopify/Etsy sellers to integrate catalogs and buy Facebook and Instagram ads, Facebook could do a lot more.

Given Facebook’s massive user base, building either standalone stores (not the current crappy Facebook stores) directly into the platform or building a robust search-and-discovery-style marketplace, Facebook could help eCommerce companies fight Amazon and actually win—and be handsomely rewarded, either through platform fees (think 5% of sales price, which is 10% less than Amazon’s fees) or appreciation of their assets.

These benefits would be greatly intensified in developing mobile-first countries, where Facebook Lite could act as the onramp to online shopping, empowering both consumers and sellers (only applicable to Shopify currently).

Streaming music service

It is surprising how little Facebook has done with audio. Specifically, a low-cost (or ad monetized) streaming music service could be hugely profitable. How many billions of people have Facebook on their phones?

Unlike video (below), music presents much easier and likely more lucrative acquisition opportunities. Pandora, the most used music streaming service (free version), has a market cap of only $1.13B. That is chump change for Facebook.

The other interesting player here would be SoundCloud, the streaming service that nearly goes bankrupt every few months. As Soundcloud clearly hasn’t figured out monetization, this could be an interesting plug and play with Facebook’s existing user base (if it employs a proper monetization model, i.e., subscription fees or advertising).

SoundCloud has raised $467M to date. They aren’t worth that now (thanks to a failing, always at the brink of bankruptcy business). An acquisition could pay back investors and set Facebook up for success.

Video

I have never understood why Facebook didn’t dedicate more resources to video. Either as a platform or as a standalone streaming service (a la Netflix), Facebook’s user base and ease of video integration would seem like an idiot-proof upsell.

To date, they have failed to make a play. And with the traction of Netflix, valued at $94B and the efforts by Amazon, Apple, and YouTube Red, can Facebook catch up?

Of course not!

And while the market for quality video content is constantly increasing, Facebook would need to build (or buy) a YouTube-like competitor to play in this space.

Unfortunately, there is no one to buy except DailyMotion. And DailyMotion’s audience of mainly millennial young men wouldn’t jive with the Facebook Video vision outlined above.

The most realistic scenario (described above) would be Facebook building their own “social” video platform and paying smaller film studios and YouTubers to join the platform. By bringing content from several genres (and hopefully stealing YouTuber followings), Facebook could further seed Facebook Video with both long- and short-form video entertainment.

If Facebook was willing to put a sufficient budget to produce free content, they could effectively attack both Netflix and Youtube in a single swoop—later monetizing via ads or subscriptions, depending on the quality and extent of their content.

Peer-to-peer payments

We discussed the implications of Facebook as a true P2P company previously. And while Facebook has been working on this for quite some time, if it doesn’t go through with the Litecoin/cryptocurrency option, it should consider an acquisition, even if only for expertise in an acqui-hire (for experience integrating into WhatsApp and Facebook Messenger).

For Facebook specifically, given their massive geographic reach, multiple acquisitions should be considered to cover different regions, acquiring both customer bases and teams with local experience.

Plus, by owning multiple entities, Facebook could over time merge/evolve them all into Facebook payments (to be embedded in both Facebook Messenger and WhatsApp), connecting users from all services across the globe.

Note: Facebook should avoid China. They would get clobbered there.

Europe and Asia

TransferWise is the market leader in Europe (with a strong presence in Asia/Singapore as well). With over £500M in transfers per month (as of May 2015), TransferWise is doing serious volume and is a major contender in the space. They just raised $280M at a $1.6B valuation, something Facebook could easily overpay to acquire it to power their own payment system.

Africa and India

Easy choice, M-Pesa. M-Pesa’s parent company Safaricom is the fourth most valuable brand in Africa (thanks to M-Pesa) with a $680M valuation. M-Pesa has a lot going for it. With over 30 million users and six billion transactions in 2016, they have empowered the unbanked to own their economic future.

M-Pesa’s impressive growth

Given Facebook Lite’s massive success in Africa (often zero-rated by many mobile carriers), Facebook has achieved astonishing growth on the continent, with over 170 million users (70% of the population with internet).

Note: As of December 2016, there were over one million M-Pesa users in India. Expect this number to rapidly grow now that the Reserve Bank of India approved M-Pesa to establish a payments bank.

Other considerations

Finding worthwhile acquisition targets in other regions is challenging at this point due to competition. However, by beginning with the areas outlined above, inherent network effects would form due to travel, overseas trade, and expats. This combined with a rollout in Facebook Messenger and WhatsApp would likely be enough of a catalyst to capture the other markets without the need for acquisition (other than China, of course).

And, as may or may not be obvious at this point, by owning the user and their funds/finances, Facebook would then become the bank of the world, at least for the underbanked.

This creates many other huge business opportunities.

Wild card 1—a P2P lending company

Piggybacking off the previous payments platform, loans seem a logical next step. And as the global P2P lending market is estimated to reach $1T by 2025, this could be a very interesting opportunity for Facebook, the company that kind of owns the world.

While acquiring a P2P payments company could help in the lending department, it isn’t necessary. Facebook could easily add lending to its existing operations. It is probably better to buy (rather than build) due to complexity, market opportunity, and the experience required to succeed.

Like the mobile payments space, there are different players in each region (and different regulations). As such, it would make sense to acquire multiple companies.

Given that P2P lending is more complex (and more challenging to plug in to Facebook’s existing infrastructure) than P2P payments, acquiring a single lending platform initially makes the most sense. After rolling this out and testing it via Facebook’s platform for scalability, they could proceed to either expand or acquire new players in each region.

Unfortunately, I’m not an expert in the P2P lending space, so way more due diligence and research would be needed to find a good value/culture/brand fit.

Wild card 2—Airbnb

Holy shit. You heard it hear first.

Airbnb’s a 100-times better business than Uber. If I was Facebook, I would find a way to buy it.

Essentially, it boils down to Airbnb being a nearly unassailable business with global network effects, which lead to a downright monopoly on travel accommodations (and soon much more).

The reason this is such an interesting acquisition opportunity is the synergistic benefits.

Note: Unfortunately all stats have different dates (bear with me). Dates will be added in parentheses (month/year).

Airbnb is exploding as a platform. With 150 million users (3/17), 640,000 hosts (11/14) and over four million listings (10/17) and more than 500,000 bookings per night (5/15), it is clear why Airbnb is killing it.

But compared with Facebook’s two billion MAUs, it suddenly seems tiny, especially considering most Airbnb users aren’t active every month.

What would happen if Facebook suddenly onboarded Airbnb into the Facebook family? How many would list their properties (or spare rooms)? How many would skip the hotel for the authentic Airbnb experience?

Your answer is as good as mine.

But with Facebook’s treasure trove of user data (including Instagram interests and recently viewed images), connecting the dots and advertising Airbnbs (and even flights via an affiliate model) as users are thinking about travel would undoubtedly convert a good deal.

And parents whose kids are moving out, well, suddenly they have a free room. A poke, a prod, and a few free Facebook ads, and Airbnb’s base of hosts (and users) would keep climbing.

But the biggest benefits would be social proof and group bookings. Inviting friends (or family) to split an Airbnb with a simple group chat on Facebook Messenger (or WhatsApp) would increase travel (especially via Airbnb) and create a viral referral loop that pulled more and more users into Airbnb.

In March of 2017, Airbnb closed a $1B growth round at a $31B valuation. For Facebook to make an attractive offer, it would need some serious debt financing.

I know this is a moonshot, but if even a small percentage of Facebook’s user base started using (or hosting on) Airbnb, this could easily cover the cost of the acquisition.