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Don’t let Facebook’s $1 billion acquisition of Instagram, its massive pile of cash, or valuable stock fool you.The company has, at the moment, zero appetite to to be an active buyer of big companies in the M&A market.
At least, that’s according to a plugged-in M&A banker we spoke to on the phone yesterday.
He told us that his firm – one of many middlemen advisory groups in the M&A industry – regularly calls Facebook’s corporate development team on deals that make sense, and that the company always passes without giving the potential merger at hand much thought.
For the moment, says this source, Facebook’s “MO” on deals is to find a “really small company with smart engineers” and make a “whatever it takes” offer to get the deal done. Despite its huge price, the Instagram deal falls into this category. The startup was only a couple years old and had maybe a couple dozen employees.
“We don’t see them involved in [major M&A] processes,” says this source.
Facebook will eventually get into buying bigger companies with more employees, more users, and bigger market caps.
Facebook’s most likely acquisition targets will share one key attribute with Instagram: they will be companies that have succeeded because they are connected in key ways with the Facebook platform.
Remember, one reason Instagram got big because people could share the photos taken with the app into their Facebook News Feed.
Likewise, Spotify hopes it can benefit from network effects by asking its users to share what they are listening to through Facebook. Pinterest, too, asks its users to log-in through Facebook. Payvment is an e-commerce platform for companies that open stores on Facebook.
The conventional wisdom in the industry right now is that instead of figuring out ways to “tax” these businesses the way it did with Zynga, Facebook might just want to buy them and takeover their revenue streams at some point in the medium term.
“Applications are being written on their platform, and if they see an application on the platform that makes too much sense to own, they’ll go out and do that,” says our M&A source. “It’s a great position to be in especially with the currency they have.”