Nearly nine years ago, Facebook (FB) discussed an acquisition agreement with Yahoo (YHOO). Unprecedented at the time, a high-riding Yahoo sought to purchase the young social network for $1 billion. Like most tech acquisition offers, Yahoo hoped to leverage its size and capital advantages in order to buy Facebook before the company realized its full potential. At the time, in July 2006, Yahoo boasted a market capitalization of more than $40 billion, which is higher after accounting for inflation, and ended the year with revenues of more than $6 billion. Facebook on the other hand was only two years old; it had nearly nine million users, and generated a mere $30 million in revenue. Although Yahoo's offer was opportune, Zuckerberg convinced the other members of his three-person board to reject it. 

Today, Facebook is the 14th largest company in the world, with a market capitalization of $225 billion, annual revenues of more than $13 billion, and 1.4 billion active users. In contrast, Yahoo’s growth has ironically stagnated since 2006. Its market capitalization still hovers around $40 billion, however Yahoo's annual revenues are now $1 billion lower than those generated in 2006. This dichotomy presents an interesting question: where would Yahoo be if it had successfully acquired Facebook?

Much of Facebook’s success over the past nine years is attributable to Mark Zuckerberg's leadership and company vision. Zuckerberg has constantly innovated within, and improved upon, Facebook’s business model. As such, the company can more easily adapt to market conditions. For example, aside from Zuckerberg, few predicted the future popularity, and importance, of mobile technology. However, as Peter Thiel revealed, had Facebook sold to Yahoo, Zuckerberg would have left the company. And without Zuckerberg, Yahoo would have undoubtedly struggled to predict, and respond to, consumer demand shifts.

Given Facebook has since, at times, deviated from Zuckerberg's plans, one could surmise that Yahoo may have shaped the company into a profitable asset. Yahoo’s core revenues are generated via digital advertising. Since Yahoo was once at the forefront of digital advertising, it's reasonable to assume Yahoo would have used Facebook to increase its advertising presence. Facebook's 9 million users would have instantly generated greater revenues. Furthermore, if Yahoo focused on growing Facebook's user base, it would simultaneously grow its digital advertising platform.

Additionally, Facebook could have provided Yahoo with an advantage in popularizing its Internet search engine. In 2006, Yahoo was a viable contender against Google (GOOG), as both battled for Internet search engine supremacy. As such, by acquiring Facebook, Yahoo could have integrated its search engine within Facebook's interface. Therefore, every time a user searched for a friend or company (on Facebook), Yahoo would serve as the filter and acquire valuable consumer data. In turn, Facebook users would inevitably become accustomed to the functionality of Yahoo's search engine, thereby increasing their likelihood of externally using "Yahoo search."

In retrospect, Zuckerberg clearly made the right decision by choosing not to sell to Yahoo. However, as with any deal of this nature, predicting the future health of both companies is impossible. For investors, reflecting on successful acquisitions and rejected offers not only provides historical context for future negotiations, but it also provides insight into how quickly market landscapes can change.