By Francesca Bandini, Kristofer Gvenetadze (Bocconi University), Ilya Korzinkin (University College London), and Christopher Shim (University of Cambridge)
Overview of the deal
Acquirer: Facebook Inc. (NASDAQ: FB)
Target: Giphy
Implied Equity Value: N/A
Total Transaction Size: $400 million
Closed date: May 15, 2020
Target Advisor: N/A
This acquisition marks Facebook’s second and final attempt to acquire Giphy for an estimated $400m. The two companies already crossed paths in 2015 when Giphy integrated itself into messenger and allowed users to get access to its database, download GIFs and paste it directly into Messenger. However, at the time, the two companies could not reach an agreement for a potential acquisition since Giphy still needed room to grow and did not want to exclude eventual partnerships with other companies.
Through this acquisition, Facebook will get access to Giphy’s library and integrate it into Instagram and other apps it owns. Despite this full integration, Giphy will still retain its own branding and allow users to have the same access to its library that they had before without any restrictions.
As GIFs are gaining momentum and becoming a new creative way for people to express themselves, this acquisition represents a strategic opportunity for Facebook, which during the last years has made private messaging its main priority. Furthermore, since more than half of Giphy’s traffic comes from Facebook’s family of apps, being fully integrated and getting access to its strong advertising firepower could transform Giphy from a popular add-on into a profitable core element.
“Giphy makes everyday conversations more entertaining, and so we plan to further integrate their GIF library into Instagram and our other apps so that people can find just the right way to express themselves.”
- Vishal Shah, VP of Product at Instagram
Company Details (Acquirer - Facebook Inc.)
Facebook Inc. (NASDAQ: FB) is an American technology company that dominates the Internet industry by offering a series of platforms where users can communicate and interact with each other. With more than 1.73bn daily active users, Facebook is not only the biggest and most popular social network, but also a social media conglomerate. Ever since its formation in 2004, the company has increased its global presence and product portfolio through a series of strategic acquisitions, with WhatsApp, Instagram, and Oculus among the most significant targets.
Founded in: 2004
Headquartered in: Menlo Park, CA
CEO: Mark Zuckerberg
Number of Employees: 48,268
Market Cap: $600.819 Billion
EV: $539.28 Billion
LTM Revenue: $73.36 Billion
LTM EBITDA: $32.54 Billion
LTM EV/Revenue: 7.35x
LTM EV/EBITDA: 16.15x
Company Details (Target - Giphy)
Giphy is an online database and research engine that allows users to search, share and discover animated GIFs, short and usually repeating video clips that have recently become a real social media mania. Founded in 2013, the company has emerged as a pioneer in the creation of these animated files with more than 700 million daily users.
Founded in: 2013
Headquartered in: New York, NY
CEO: Alex Chung
Number of employees: 51-100
Market Cap: $300 Million (as of 2016)
EV: Not Disclosed
LTM Revenue: Not Disclosed
LTM EBITDA: Not Disclosed
LTM EV/Revenue: Not Disclosed
LTM EV/EBITDA: Not Disclosed
Projections and Assumptions
Short-term consequences
The acquisition of Giphy will provide Facebook with a fresh database consisting of 65 million monthly active users. Of course this number is minimal compared to facebook’s active user count, but it provides a loyal user base which can be easily expanded in the following months through the integration of Giphy into Facebook’s digital ecosystem. Following the announcement, Facebook’s shares showed a 2% increase from $206.81 to $210.88, indicating that investors have an optimistic outlook even if the company is facing intense regulatory scrutiny.
The database will provide valuable information regarding current trends, emotional patterns, and preferences of users. Essentially enabling Facebook to create new advertising formats for the younger audience and tailor them to their current interests. Furthermore, given that Facebook accounts for 50% of Giphy’s usage, they will now be able to have access to cross-platform data provided by the residual apps where Giphy is integrated, such as: iMessage, Snapchat, Telegram, TikTok and skypespot. The cross-platform data will provide Facebook with more diversified information.
Both companies kept the deal quite private and did not disclose much information, but it has been confirmed that Giphy’s employees will be integrated into Instagram. Considering that Instagram has a very high engagement rate and Giphy’s key audience is mainly active there, it is reasonable to set the focus on that platform.
Long Term Upsides
Acquiring Giphy at $400m as opposed to the estimated $600m valuation at a time of uncertainty, arguably explaining the lower than expected price tag, gives Facebook access to vast amounts of auxiliary behaviour data related to how GIFs are used across thousands of apps and websites. This will allow the company to further improve its ad tracking capabilities, thus boosting its sponsored content-centric revenue generation. The acquisition has stirred concerns amongst users who are increasingly hostile towards Facebook's policies surrounding personal data usage. Some users have chosen to delete their accounts before the transition is made or switch to messaging apps like Signal, that use a piracy-preserving proxy and still offer GIFs. Unsurprisingly, this will make absolutely no considerable dent in Giphy’s user numbers.
Whilst it is clear how Facebook benefits from the acquisition, it would be wise to analyse the timeline of Facebook’s acquisitions to date, to further shed light on where the social media pioneer is looking to develop to next.
Graph: Valuation of Acquired Company (CB Insights)
Facebook’s bolt-on acquisition strategy is nothing new. Some have even made an unlikely comparison between Warren Buffett and Mark Zuckerberg, stating that the two may have more in common than one may think. Facebook, like Berkshire Hathaway has grown throughout making targeted value investments in full of potential, and sometimes unknown companies. The company has acquired 76 companies for an undisclosed price tag over the past 15 years, however very few of Facebook’s acquisitions have received widespread media coverage, mostly because of their small comparable value to WhatsApp or Oculus.
However it is these smaller targeted acquisitions like Bloomsbury AI, Masquerade, or Hot Potato, which has allowed Facebook to introduce subtle new features. Indeed, gaining more precise location tracking or masks for Instagram, and improving these features over time, has been hugely successful in terms of driving traffic to Facebook's platforms. So where does Giphy fit into this strategy? Perhaps because of the data-collection, advertisement data enterprise analytics and ad- tracking uses, Giphy may fall into a similar category with Onavo and Atlas Advertiser. These improved the efficiency of Facebook’s advertising revenue model considerably.
For scope, some companies have been acquired for their team rather than their tech innovations. For example, it is believed Facebook's rationale behind acquiring Beluga was to bring on a sizable number of Google-trained engineers to further add value to their workforce. It is also worth mentioning that Facebook has made acquisitions in completely uncharted territories such as Ascenta (UAV’s) and CTRL labs (software control using brain waves), which shows the true scale of Facebook’s ambition for diversification. To date, Facebook’s acquisition portfolio’s value is $23,760,700,000, which is just $200 million short of the nominal GDP of Iceland.
Risks and Uncertainties
The primary source of concern is the antitrust issues Facebook faces, because even if the acquisition is unlikely to trigger a mandatory review from federal regulators, the company still needs to be careful. The company is not new to regulatory scrutiny. Over the past years, the company has been investigated for anti-competitive behavior after a series of controversial and aggressive acquisitions, with Instagram and Whatsapp among the most significant targets. Moreover, last February the Federal Trade Commission (FTC) announced that it will open investigations into past acquisitions by Facebook and other tech giants for potential anti-competitive behavior. As a result, this might not be the best time for acquisitions which may become controversial later on.
Facebook has been involved in several scandals regarding the illicit use of user data, so the integration of Giphy’s library into Facebook is a legitimate concern for many users. Giphy users specifically might identify this acquisition as a potential threat given that Facebook adjusts the data policies of acquired companies to line up with their own.
Many companies, including Facebook’s rivals, rely on Giphy’s library of sharable content and other services. This acquisition could exclude them from using the service and give Facebook real insights into the user patterns of their competitors. In the past, Facebook has tried to learn more about its competitors through a series of acquisitions aimed at getting increasing amounts of data. The most controversial example is the acquisition of VPN app Onavo. After having purchased the company for a value of $200 million, Facebook was able to get exclusive information about trending messaging platforms such as Whatsapp, which it strategically bought the following year.