Facebook's 'Fear of Missing Out' M&A Strategy

NEW YORK (TheStreet) -- Facebook (FB) CEO Mark Zuckerberg may be displaying symptoms of a Wall Street disease known as "fear of missing out," or FOMO, as the social network continues to gobble up companies in billion dollar deals.

It is increasingly clear that when it comes to M&A, Mark Zuckerberg controls Facebook's over $11 billion bank account and its near-unlimited ability to use its stock as an acquisition currency. Zuckerberg's explanation for his deal-making ways, however, appears bold... and a bit speculative.

Case in point: On Tuesday, Facebook acquired Oculus VR, a virtual reality platform that venture capital investors in the company compare to Silicon Valley's biggest breakthroughs, for $2 billion in cash and stock. While Facebook is shelling out $400 million in cash and $1.6 billion in stock for Oculus VR, in addition to an additional $300 million earn-out in cash and stock incentives, the deal is unlikely to have an earnings impact in the next few years.

Zuckerberg's thinking in the Oculus VR deal and even larger acquisitions such as a $19 billion deal for messaging application WhatsApp appears centered on ambitious long-term bets -- an admirable goal for any company founder and something many would argue is generally lacking in Corporate America.

On Tuesday evening, Zuckerberg also appeared to lay out a plan to play a long-game through large acquisitions and bold investments, as Facebook simultaneously executes on its near-term objectives surrounding mobility, advertising and growth.

Both augur positively for Facebook, especially as larger tech sector competitors such as Apple (AAPL) and Microsoft (MSFT) focus internally. Meanwhile, media reports indicate that Facebook is increasingly winning an M&A battle against Google (GOOG) to buy the next big thing in Silicon Valley. Yahoo! (YHOO) is also about to inherit a small fortune from Alibaba's IPO, potentially creating a new, deep-pocketed bidding rival for Facebook.

"For almost the last year, I've framed our strategy as three high-level goals over the next 10 years, connecting everyone, one; two, understanding the world; and three, building the knowledge economy. With this acquisition, now each of those initiatives has an ambitious long-term bet associated with it in addition to our important near-term work as well," Zuckerberg said on Tuesday.

Some stock analysts agree. "[It] is in our opinion the first major acquisition that Facebook has made that is offensive," Piper Jaffray analyst Gene Munster said of the company's Oculus VR acquisition. Like Google, Munster said Facebook is thinking forward.

"We believe that Oculus is a big bet on the future of visual computing and we may see Oculus as Facebook's 'Android' moment 10 years from now," Munster said.

Of course, Google bought Android for $50 million and Facebook is buying Oculus VR for $2 billion. Price appears to be beside the point.

FOMO Trumps Price

However, parsing Zuckerberg's words also indicates that Facebook's CEO and controlling shareholder may be doling out billions of dollars for the simple reason that he is fearful of missing out on the next big technology. The latter might worry shareholders. FOMO thinking, after all, is often the psychological underpinning of asset bubbles, a real concern currently running through Wall Street and Silicon Valley.

Other prominent dealmakers such as Warren Buffett of Berkshire Hathaway (BRK.A) have made a career of distancing themselves, if not cutting against, the psychological winds of asset markets. Acquisitions such as Lubrizol, Heinz and BNSF Railways indicate that Buffett is willing to sit on his hands for years, if not decades, until an acquisition target is the right price.

One might wonder, in contrast, if Zuckerberg's deal-making frenzy in 2014 is overly emotional and too focused on finding the next big thing.

"I think the key thing to keep in mind on this is these are all incredibly rare companies," Zuckerberg said of Facebook's three billion-dollar acquisitions: Oculus VR, WhatsApp and photo-sharing specialist Instagram.

"So we'll go a long period of time without doing anything like this and then I think we're in this kind of rare period now where we've just done two really close to each other. So I definitely don't think you should expect us to make multiple multi-billion dollar acquisitions within a couple of months frequently," Zuckerberg added.

That may provide a relief to investors digesting Facebook's over $20 billion in acquisitions in 2014, a number that exceeds the M&A activity of Apple in its entire history.

However, Zuckerberg's final explanation of the deal indicated the company would buy companies it thought were "rare." That certainly is important given the success of some large Silicon Valley takeovers like YouTube and Instagram. On the same token, seeking rare assets for fear of losing them to a competitor is surely a slightly speculative way of thinking.

"[The] way that we're thinking about this is WhatsApp is one of the incredibly rare companies that we think will reach a billion people, and every company that reaches a billion people is incredibly valuable. And also, there are not that many things that are candidates to be the next major computing platform. And this company, Oculus, has a very clear lead in doing that, and we felt like we could apply a lot of levers to accelerate their growth. So these are two kind of rare instances, and in the future, when we find rare companies, we'll consider this," he concluded.

Bottom Line: If Mark Zuckerberg is only interested in buying rare tech innovations, there is reason for Facebook shareholders to worry that the company's CEO will wind up holding onto a pile of fool's gold.

-- Written by Antoine Gara in New York

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