Microsoft Corporation (MSFT), Google Inc (GOOG), Facebook Inc (FB): Is Buying Growth Companies Worth It?

Moreover, Microsoft Corporation (NASDAQ:MSFT) won’t be able to integrate Skype with its core business (Office, Windows, etc.) as Google did with YouTube, which brings into question if Microsoft Corporation (NASDAQ:MSFT) will be able to augment Skype’s revenue and profits with Microsoft’s products and services.

Facebook Inc (NASDAQ:FB)

The acquisition of Instagram for nearly $715 million in August 2012 raised a lot of questions as to whether this purchase will have a positive ROI. But Facebook Inc (NASDAQ:FB), much like Google, has a very widespread platform to expand this app’s popularity. Instagram expanded its number of users from one million at the end of 2010 to more than 100 million users by the end of February.

But the high sticker price Facebook Inc (NASDAQ:FB) paid consisted mostly of goodwill: Facebook Inc (NASDAQ:FB) valued the company at $521 million with goodwill of $433 million. This means that goodwill accounted for nearly 83% of Instagram’s value. So Facebook Inc (NASDAQ:FB) paid a high price mostly for goodwill and a higher price than Instagram’s own estimated fair-value.

This could make it harder for Facebook Inc (NASDAQ:FB) to get its investment back in the near future, which could impede the company’s stock from rising.

The bottom line

I don’t think there is a clear-cut answer for if reaching growth by purchasing companies is the right way to go. If the company presents a very good integration with its core business and doesn’t pay most of the price for goodwill, then this could eventually lead to a positive return and not just growth in sales. Otherwise, the investor should consider these purchases might pull down a company’s value.

The article Is Buying Growth Companies Worth It? originally appeared on Fool.com and is written by Lior Cohen.

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