LiveRail also provides a real-time bidding platform for marketers looking to place ads on online videos.
The firms did not reveal the financial terms, but some reports indicate that Facebook paid between $400m and $500m (£233m and £291m) to buy the firm.
Online video advertising is forecast to grow robustly in the coming years.
"More relevant ads will be more interesting and engaging to people watching online video, and more effective for marketers too," Brian Boland, vice president of ads product marketing and atlas at Facebook, said in a blog post.
"Publishers will benefit as well, because more relevant ads will help them make the most out of every opportunity they have to show an ad."
According to LiveRail, it delivers more than seven billion video ads per month.Growing importance
The online and mobile ad sector has been growing rapidly in recent years.Continue reading the main story “Start Quote
It is no longer about saying, 'My ad was was seen by so many people.' But it is now about knowing who those people are and how they have responded to the information fed to them”End Quote Sanjana Chappalli LEWIS Pulse
According to a study published in April, more than £1bn was spent on mobile ads in the UK alone in 2013, a rise of 93% on the previous year.
Some other estimates suggest that online video advertising revenues are likely to hit $6bn in the US this year.
Twitter, acquired MoPub mobile advertising exchange last year.
MoPub acts as a mediation service, allowing marketers to manage the placement of ads across several networks, including Facebook's.
Analysts said that given their large user base, social networks were likely to get a big share of this growing market.
"It is no longer about saying, 'My ad was was seen by so many people,'" said Sanjana Chappalli, Asia-Pac head of LEWIS Pulse, a firm specialising in digital marketing.
"But it is now about knowing who those people are and how they have responded to the information fed to them.
"And on that front, social networks enjoy a tremendous advantage over everyone else." she added.
Meanwhile, Google's AdMob and Apple's iAds platforms and several other smaller firms are also competing to provide the adverts shown on mobile phones and tablets.
Millennial Media, Flurry and Nexage are among the firms promoting their own versions of "programmatic buying" - a way for firms to target their ads at a specific type of consumer via a chosen type of app at an appropriate time and geographic location.