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Facebook to 'tread very carefully' in M&A space amid antitrust woes – analysts

Facebook Inc.'s latest legal challenge from the U.S. Federal Trade Commission and a group of attorneys general could have the social platform thinking twice before buying up any further potential competitors, analysts say.

The FTC and 48 attorneys general from across the U.S. recently filed two separate antitrust lawsuits against Facebook. The suits allege that Facebook has engaged in anti-competitive behavior and called for a slew of potential remedies. These remedies include unwinding the company's acquisitions of photo-sharing app Instagram LLC and mobile messaging service WhatsApp Inc., and requiring Facebook to gain approval for future M&A. Though analysts mostly expect Facebook to prevail in court, they note that the increased regulatory scrutiny on the company as a result of the lawsuits could limit its ability to pursue strategic acquisitions in the future a move Facebook has long favored to stay ahead of the competition.

Both lawsuits call out the social site for allegedly stifling potential competitors and consolidating its monopoly in the digital advertising market. Notably, each takes issue with Facebook's acquisitions of Instagram and WhatsApp in 2012 and 2014, respectively, as examples of the company's strategy to acquire rather than compete directly with emerging social media platforms. As a requested remedy, the FTC asks the court to require prior notice and prior approval for future mergers and acquisitions. The states' ask is more specific, requesting the judge to prevent Facebook from completing future acquisitions valued at or above $10 million without prior approval.

Evan Niu, a senior technology specialist at financial advisory firm The Motley Fool, considers Facebook the most vulnerable tech player to anti-competitive criticism given its propensity for remaking products introduced by competitors or acquiring those competitors outright.

"They've done this so many times, it's like their M.O.," Niu said in an interview. "If there's any social media service or new app that comes out that's remotely popular, they're going to try to copy it and/or buy it."

This view is reflected in documents obtained by the FTC as part of its investigation. In one email unearthed by the agency, Facebook CEO Mark Zuckerberg allegedly said "it is better to buy than compete."

Facebook's purchase of WhatsApp for $19 billion counts as the company's largest-ever acquisition, following by its $2 billion deal for virtual reality company Oculus VR LLC, also in 2014. The company's $1 billion purchase of Instagram is its third-largest deal.

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But between and beyond those headline-making deals are smaller transactions or acquisitions whose financial details were not disclosed. Most recently, the company agreed to buy the customer service startup Kustomer. Though the terms of the deal were not disclosed, multiple outlets pegged the price at about $1 billion.

All told, Facebook has announced eight deals in 2020, up from six in 2019.

Though Niu noted that Facebook has "plenty of money" to afford future big deals, he expects the company to "tread very carefully" in the M&A arena in the near term amid the antitrust lawsuits.

Of course, M&A is not the only tool in Facebook's toolbox. In addition to acquiring smaller startups, Facebook also has a history of remaking products introduced by competitors and including similar features in its own offerings. Most notably, the company's Instagram unit in 2016 debuted Instagram Stories, a Snapchat-like feature in which photos disappear after 24 hours. This year, Facebook's Instagram launched Instagram Reels, a feature that is similar to emerging video-sharing app TikTok. Reels lets users record, edit and share 15-second multiclip videos on their own feeds as well as the broader Instagram platform.

For his part, KeyBanc Capital Markets analyst Justin Patterson defended Facebook's M&A strategy, noting in the case of Instagram and WhatsApp that no competitors at the time prevented the company from acquiring those assets. Moreover, he said the level of success Facebook has seen with these acquisitions is "more of a rarity than the norm."

"Historically, many tech M&A deals center around acquiring competing products and giving them scale, and many deals also fail to live up to expectations," Patterson wrote in a recent report. "It remains unclear to us if Instagram and WhatsApp would have achieved this degree of success without Facebook."

Rather than forced divestitures, Patterson expects Facebook to pay a sizable fine at the end of the legal battle and also face additional scrutiny on future M&A.

Scott Denne, a senior analyst at S&P Global Market Intelligence's 451 Research, is similarly skeptical that Facebook will be required to sell off its Instagram and WhatsApp units, considering such an outcome a remote possibility that remains several years off.

"It's hard to know where Facebook will be if and when that happens," Denne said. "It's a big if, and it's a long ways away."

Wall Street thus far seems to share this view. Compared with their close on Dec. 8, the last full trading day prior to the FTC and states' suits, Facebook was down a little more than 3% as of market close on Dec. 14.

For its part, Facebook has said the complaints amount to an attempted "do-over" of acquisitions previously cleared by regulators. The company's COO Sheryl Sandberg also criticized regulators' attempts to retroactively evaluate previously approved mergers, noting such a practice would be a "really big chilling problem for American business." She also pushed back on the notion that Facebook does not face competition.

"There's our services but there's [Apple Inc.'s] iMessage, there's TikTok Inc., there's Snapchat, many of which have grown very big, very quickly," Sandberg said during a recent appearance on "The Tamron Hall Show." "If you want to get electricity today for your home, you've got one choice, but you've got lots of choice for your time and attention."

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