latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/uk-s-facebook-giphy-deal-scrutiny-is-sign-of-m-a-challenges-to-come-8212-analysts-61114342 content esgSubNav
In This List

UK's Facebook, Giphy deal scrutiny is sign of M&A challenges to come — analysts

Blog

Volume of Investment Research Reports on Inflation Increased in Q4 2021

Blog

Price wars in India: Disney+ Hotstar vs. Amazon Prime Video vs. Netflix

Blog

Using ESG Analysis to Support a Sustainable Future

Podcast

Next in Tech | Episode 48: The everything that is Industrial IoT


UK's Facebook, Giphy deal scrutiny is sign of M&A challenges to come — analysts

Scrutiny of Facebook Inc.'s acquisition of animated-picture database Giphy Inc. in the U.K. suggests the country is taking a harder line on the social media company's deal-making.

The U.K.'s Competition and Markets Authority instructed Facebook not to integrate Giphy into its business until the regulator had made a decision on whether the transaction harms competition.

The CMA's scrutiny is part of a broader regulatory shift in Europe that could see Facebook limit itself in the region to minority stake acquisitions or transactions that do not involve consumer-facing companies, analysts said.

"Anything consumer-facing is a no-no for regulators" and comes with the added burden of concessions, Kevin Rippey, a co-head of internet research at Evercore ISI, said. Watchdogs are keeping a close eye on big tech's interest in services "with a brand name attached to them on the consumer front," Mark Shmulik, a research analyst who covers big tech at Sanford C. Bernstein & Co. said, adding that the takeovers "do not even need to be data-centric."

SNL Image

Facebook is no stranger to strategic minority investments. In the digital payments space — where it has also struggled with regulatory scrutiny — the company recently spent $5.7 billion on a 10% stake in India's Jio Platforms Ltd., a telecommunications business owned by Reliance Industries Ltd., Shmulik said. It followed that with an undisclosed investment in Indonesian ride-hailing service GO-JEK.

Both transactions were viewed as a means of capturing a larger slice of the two countries' growing digital economies by way of WhatsApp. The deals could also mark the start of a "pivot" into minority investments for Facebook to "solve what [it] used to do through flat-out acquisitions," Shmulik said.

In other words, some of what Facebook saves in M&A costs could be diverted elsewhere. In 2021, Facebook expects total costs to rise to between $68 billion and $73 billion, a year-over-year increase of roughly 32%. The increase is driven by investments in product development and technical talent, the company said.

Not all of Facebook's transactions in Europe will attract regulatory scrutiny, analysts said. Takeovers in the enterprise and machine learning takeovers aimed at monetizing its recent COVID-19 induced user number growth and boosting its fledgling e-commerce bet.

The company in its third quarter reached 2.74 billion monthly users on its Facebook platform, an increase of 12% year over year. To capitalize on the COVID bump, it could invest in machine learning-oriented acquisitions to further optimize its backhaul, according to Rippey. Specifically, Facebook may find it easier to purchase smaller AI and computer vision firms with 10 to 20-strong personnel, he said.

Machine learning deals are generally less visible as only industry experts "are aware of what those technologies might do in the broader Facebook ecosystem," Rippey explained. Tinkering with its back end would allow Facebook to effectively monitor user behavior, including the types of media and posts that gain the most traction with new and existing users, in turn allowing it to boost its digital advertising conversion rates, he said.

Enterprise is another area that tends to draw less regulatory scrutiny versus deals for consumer services, according to Shmulik. "The general view is that businesses can take care of themselves and don't need as much protection," he noted.