Facebook $16 Billion IPO Seem Fueling Strategic Deals

Facebook Inc. (FB)’s initial public offering will give Chief Executive Officer Mark Zuckerberg access to more than $15 billion that may step up the pace and size of acquisitions after a $1 billion deal for Instagram.

Facebook, whose deal efforts are being driven by Amin Zoufonoun, raised $6.84 billion in the IPO yesterday, adding to a $5 billion credit line set up earlier this year and $3.91 billion in cash holdings. The public market makes shares of the social network easier to use as currency for acquisitions after years of being exchanged on thinly traded private markets.

“I see them making acquisitions across the spectrum, big and small -- and they should be,” said Maha Ibrahim, a partner at venture capital firm Canaan Partners in Menlo Park, California. “They have the heft, and now they just need to monetize even better than they’re doing.”

Facebook, whose shares began trading today, could use acquisitions to bulk up its business in areas such as mobile, advertising, payments and video-sharing. While Zuckerberg has pursued mostly small takeovers in the past, the Instagram deal demonstrated that the company is willing to make larger purchases of established companies, said Brian Wieser, an analyst at Pivotal Research Group LLC in New York.

“I expect we will continue to be surprised by the scale of some of these acquisitions,” Wieser said. “I previously did not expect much in the way of meaningful acquisitions.”

Karma Deal

Facebook said today it will acquire Karma Science Inc., which makes a mobile application for gift shopping. The San Francisco-based startup has applied for three patents, covering areas including commerce and notifications, said Amy Swanson, a spokeswoman for Karma. Terms of the deal weren’t disclosed.

Zoufonoun, Facebook’s director of corporate development, reports to Vice President Vaughan Smith. Zoufonoun was at Google Inc. for about eight years before arriving at Menlo Park-based Facebook last year. The company is expanding its team working on deals, with at least three open positions in business development, according to Facebook’s website.

Even before the IPO, the company’s coffers were growing. Facebook amassed $3.91 billion in cash and short-term investments on its balance sheet through the end of the first quarter, according to a filing with the U.S. Securities and Exchange Commission. In March, Facebook said investment banks, including Morgan Stanley and JPMorgan Chase & Co., arranged an $8 billion financing package, including a $5 billion credit line to be used for working capital and other general corporate purposes, and a $3 billion bridge loan to fund taxes for employees who exercise restricted stock units.

IPO Proceeds

In the wake of the IPO, Facebook has said it will need to spend an estimated $4.4 billion to cover such taxes. The units can’t be sold until about five months after the IPO.

Including shares sold by investors, the total IPO proceeds were $16 billion.

For now, Zoufonoun can put the IPO windfall to work and help Facebook intensify its challenge to rivals such as Google, according to Sameet Sinha, an analyst at B. Riley & Co.

There are a lot of other cash-rich tech companies vying for deals. Microsoft (MSFT) Corp. has $59.5 billion in cash and short-term investments. Apple Inc.’s war chest has swollen to $110.2 billion -- though it hasn’t been an active acquirer. More likely, Facebook will go up against Google, which had $49.3 billion in cash and short-term securities at the end of March.

“They need to compete against Google’s treasure chest,” Sinha said. “You’re fighting with so many big players in so many big industries.”

ValueClick, Payvment

Acquiring online advertising companies could fill a need at Facebook, especially for extending ads outside of the site, Sinha said. If the company were seeking to bolster that effort, ValueClick Inc. or one of Microsoft’s ad-technology businesses could be a target, Sinha said. To shore up e-commerce offerings, Facebook could buy a shopping startup, such as social-buying service Payvment Inc., or an online-payment provider, he said.

Building on the Instagram deal, Facebook may go after a social-video sharing service like Viddy Inc. or Socialcam Inc., said Arvind Bhatia, an analyst at Sterne Agee & Leach Inc. And while there are plenty of targets in the U.S., buying or investing in a China-based technology company would help Facebook finally make its way into the country, he said.

Media companies, including music providers, may also be on Facebook’s wish list, Pivotal’s Wieser said. Potential targets may include Spotify Ltd., which already uses the Facebook platform to reach users, and online radio pioneer Pandora Media Inc. (P), which had a market value of $1.74 billion yesterday.

‘No Shopping Spree’

Still, it’s unlikely Facebook will just build up a portfolio of content companies, said Rebecca Lieb, a digital- media analyst at Altimeter Group in New York. The social network will probably continue to let such providers run on its platform while remaining independent, she said.

“The IPO will not be the moment when Facebook gets daddy’s credit card and goes on a shopping spree,” Lieb said. “Their purchases will be judicious, especially for a company that has not made a ton of acquisitions in the past.” She said data- management software may be an attractive industry as Facebook seeks to handle the information streaming in from its more than 900 million users.

Jonathan Thaw, spokesman for Facebook, declined to comment, as did representatives of Microsoft, ValueClick, Payvment, Viddy and Spotify. An e-mail sent to Socialcam CEO Michael Seibel wasn’t returned.

Patent Cache

Beyond targeting companies for acquisitions, Facebook is also spending on bolstering its cache of intellectual property. In April, Facebook said it would pay $550 million to buy about 650 patents and applications from AOL Inc., as well as a license to AOL patents and applications that Microsoft will purchase and own.

To accommodate its swelling user base and the reams of data members upload to its site daily, Facebook plans to spend billions of dollars over the next five years to boost its capacity and build data centers. In a filing, Facebook said capital expenditures will be $1.6 billion to $1.8 billion this year. The company’s capital spending may rise to $2.2 billion in 2017, Pivotal’s Wieser wrote in a May 4 research note.

“The company needs one new major data center each per year beyond those currently committed in Oregon, North Carolina and Sweden,” Wieser wrote. Facebook may want to build centers in China or Australia, said Virginia Agee, a research director at IDC.

Glancee, FriendFeed

Facebook has made more than 30 purchases or talent acquisitions -- deals made mainly to gain a company’s engineers or staff. One of the most recent was Glancee, a startup that helps users make new friends based on their locations. The 2009 acquisition of social-media aggregator FriendFeed brought over Bret Taylor, who later became Facebook’s chief technology officer.

“As part of our business strategy, we have made and intend to make acquisitions to add specialized employees, complementary companies, products, or technologies,” Facebook said in its IPO filing.

Still, at the time of the Instagram announcement, Zuckerberg cautioned against reading too much into the size of the purchase, which is set to close later this year.

“It’s the first time we’ve ever acquired a product and company with so many users,” he said in an online post in April. “We don’t plan on doing many more of these, if any at all.”

With the addition of cash from the IPO and the ability to issue shares for an acquisition, Sterne Agee’s Bhatia said he expects Facebook to move quickly with an acquisition in cases where it would take too long to catch up on its own.

“If it’s going to take them some time to develop something that’s becoming popular, they will try to bring that in-house,” he said.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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