Facebook Should Buy This Company
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook’s (NASDAQ: FB) massive network could be the perfect fit for the right business. A great acquisition would help improve public sentiment that management can deliver. It would diversify their revenue while giving the said business a huge distribution chain. And it could be a long-term win-win for all the parties involved – including shareholders.
Today we’re going to examine four growth companies and identify which one best complements Facebook’s existing network. It’s time to put on your CFO hats.
Available Funds
How much can Facebook afford without straining themselves? As of last quarter, they are sitting on $10.2 billion in cash. Their debt-to-equity ratio is a paltry 0.03, having only $394 million of long-term debt. To top it off, they have access to a $5 billion line of credit, ensuring sufficient working capital. In other words, Facebook could easily take on buying a company worth up to $10 billion.
They can foot the bill in one of three ways -- with cash, debt, or equity. Given recent share performance, using equity is a great way to tick off already ticked off shareholders. Interest rates are currently low, and if they can get a good deal on borrowing, it would be a great way to preserve their financial integrity. Finding a self-sufficient business would be ideal for this approach. That way it could pay for itself with its own cash flow, and ideally, still have some left over for the piggy bank.
It's Their Best Quality
Facebook's best character trait is their ability to make the world more connected. Leveraging this strength would be a best deployment of strategic capital, and would likely win over the minds of shareholders. The idea that Facebook has the ability to be multi-dimensional is a big one. But where should they focus?
Setting Sights
What information are Facebook users seeking? When do people turn to Facebook for answers? I’m not talking about search, or Facebook developing a search engine. I’m thinking about reviews, like which restaurant should a user go to, or what hotel they should stay at, or where can they find the best deal. This is valuable information and Facebook users value their friends’ opinion. Leveraging this behavior could enhance the network’s ability to work harder for the bottom line.
The Candidates
Location data is already a big part of the Facebook experience. Targeting other businesses that utilize similar approach is a natural fit because it would easily integrate into the platform. Below I’ve isolated four companies that fit this requirement.
Yelp (NYSE: YELP) connects its 78 million monthly visitors to over 30 million local business reviews. Want to know which dentist to trust? Yelp may offer that crucial insight before getting that new blingin’ grill installed. For Facebook users looking for trusted peer reviews, Yelp would be a welcome addition. It would open up their business to over 900 million more users. The drawbacks? Yelp doesn’t have a largely developed international presence. Outside of the US, they operate in 16 other countries, most of which are in Europe. Strategically, this doesn’t sound like a great fit because the company has too small of a presence. Developing another business probably isn’t part of Facebook’s core priorities. Moving on.
Open Table (NASDAQ: OPEN) connects its users to over 25,000 restaurants across the globe. A company like Facebook’s could take Open Table to the next level. They make money by selling restaurants an online reservation system, and take a cut when a diner books a table. They claim the system pays for itself with three booked reservations per month, provided the average ticket is $42.50 per person for a table of three.
It’s clear this system is intended for specialty restaurants with high tabs. Is Facebook a specialty social network with limited appeal? The business prospects for Open Table may not offer enough potential for Facebook to scale up. However, Open Table has done an excellent job at growing their business and Facebook users gotta eat somewhere.
Open Table has more than doubled its revenue in a three year period, as well as tripled its free cash flow at the same time. This might be a good candidate if Facebook wants to buy a business that’s like a crock pot – a business where they can set-it-and-forget-it. With the stock off its highs by over 50%, the timing smells right.
Groupon (NASDAQ: GRPN) connects its users to great local deals. They operate in 48 countries, have over 10,000 employees, and 33 million registered users. They are growing sales like gangbusters, but operating expenses are a growing concern. Last quarter, they churned their first ever profit. If they want to preserve the $1.3 billion of cash on the books, future profitability is essential. Shares are down over 80% from the IPO because their long-term viability has come into question. With a business that’s easily repeatable, it’s a warranted concern.
A Facebook and Groupon deal could bring Groupon a lot more business at a fraction of the cost. Facebook already has the distribution network, and Groupon could reap the benefits of free advertising.
TripAdvisor (NASDAQ: TRIP) is the Facebook of travel. It’s the largest online travel community in the world. You can research the perfect hotel, beach, and restaurant for your next vacation. Pick a place in the world, and more likely than not, you’ll find a review. With over 75 million in total, it’s not difficult to find something of interest. They operate in 30 countries worldwide and welcome 56 million monthly visitors each month.
Best of all, they have been well in the black over the last three years. In this time, they’ve nearly doubled both the top and bottom line. With a $5 billion market cap, it’s a growing company that Facebook could easily afford.
Drum Roll Please!
Facebook needs to get shareholders back on their side. Making the right acquisition could send a message that Facebook is taking their public duty seriously. Considering all the candidates discussed, Facebook wants a business they can bolt on to their existing network. A business where they have to grow themselves probably isn’t the right fit. With that in mind, TripAdvisor is the natural fit because both platforms are reliant on user generated content. Both are profitable and growing at a good clip.
TripAdvisor and Facebook complement each other. For TripAdvisor, it would bring a larger audience, and for Facebook, it would boost the average revenue per user. On the surface, this match is a win-win. Now, when will they step up to the plate?
Dig Deeper
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TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and TripAdvisor and has the following options: short OCT 2012 $40.00 calls on OpenTable and long OCT 2012 $40.00 puts on OpenTable. Motley Fool newsletter services recommend Facebook, OpenTable, and TripAdvisor . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
