When hearing about the $1.1 billion all cash purchase price Yahoo paid for Tumblr my initial response was one of disbelief.
On Twitter I wrote “So the Yahoo board is going to vote on paying $1.1 billion for Tumblr, a company that last year did only $13 million in revenue”.
Friends of mine on Twitter put forward reasons why Yahoo would look at an asset like Tumblr and assign the value they did – namely the future potential of the user base and page views and that by purchasing Tumblr they were buying the right to accelerate the revenue of the business.
All valid points. But I still wasn’t convinced, taking to Twitter again and stating that “Paying this sort of money for an asset like that seems crazy to me”.
A friend wrote back “You say that every time a technology company gets acquired”.
Thing is – he was right. More times than not when I see a company has been acquired in the digital or media space my first thought is ‘they paid how much?’
Since Yahoo made the announcement there’s been no shortage of pieces where the merits of the deal are analysed and discussed. On one hand the deal has been called "desperate", a demonstration that Yahoo is buying its way back into the hearts and minds of those under 30. On the other hand those who applaud the deal cite that acquiring Tumblr plays beautifully to the vision of Yahoo being a daily habit that has mobile as a central element.
The reality with this sort of M&A activity is that it generally takes many years to truly analyse whether a purchase was a wise one. And while it’s been said that 75 per cent of mergers and acquisition activity fails to achieve its stated objectives (Nguyen and Kleiner, 2003), that statement in itself assumes that when the acquisition was made the objectives were clear and accurate. It also assumes that the objectives will remain the same into the future. In the fast moving world of technology and media, often this is not the case.
Denzil Rankine knows a lot about what makes an acquisition or merger successful, in fact he has written the book on it. Put simply, they live and die depending on five key areas:
– the logic behind the deal;
– the understanding of the new business;
– management of the deal;
– integration of the asset;
– ongoing corporate development of the acquired asset or merged asset.
Given these, I looked back at some of the M&A activity that really stood out to me over the past 15 years and whether these activities could be deemed successful or unsuccessful, or even whether it was still undecided.
1999 – Yahoo acquired Broadcast.com ($5.7 billion) and Geocities.com ($3.6 billion)
Yahoo dropped a combined $9 billion on these two assets – both of which no longer exist. With Broadcast.com Yahoo bet on video and audio streaming being significant future pillars of the business. They were right. But Broadcast.com was not the asset to allow them to play in that space. Analysts at the time felt that the purchase was strategically sound, placing Yahoo in the video and audio space and offering a platform to dramatically change its advertising suite. However, 1999 was too early and Broadcast.com wasn’t the asset to deliver this.
Issue: lack of understanding of the new business. With Geocities, Yahoo was buying a site with a lot of users … but a lack of purpose. Geocities was left to wither inside a bigger Yahoo! corporate environment.
Core issue: the integration of the asset.
2003 – Yahoo acquired Overture ($1.63 billion) and Inktomi ($235m)
Seeing the potential in paid search and ‘suggested results’ Yahoo paid $1.6 billion for the company that invented the idea, Overture. Overture, and the technical foundations of Inktomi, created the backbone of Yahoo’s search product, which despite not being the size of Google has been an impressive earner for the business. Furthermore, in 2004 Google was forced to settle with Overture over claims it had infringed Overture copyright. The payment was 2.7 million shares in Google, most of which were sold in 2004 at the IPO price at around $80 (they are currently sitting at $889). History will look back on the Overture and Inktomi acquisitions as successful – a compelling deal that was well integrated and well commercialised.
2005 – News Corporation acquires Myspace ($580 million)
In 2005 Myspace was the hottest digital asset in the world and two companies wanted it bad, Viacom and News Corporation. News won the battle, and the story is then Viacom chief executive Tom Freston ultimately lost his job over losing the deal. Myspace had two strong years of growth under News but ultimately became a significant liability, losing money and hemorrhaging value as Facebook quickly made the tool a relic of the internet. After being hailed a visionary for seeing the potential in Myspace in 2006, by 2010 news chief Rupert Murdoch and News were mocked for their move. Which shows that often initial impressions around the merit of M&A activity are misguided. News sold Myspace to Specific Media. A lot of the blame around the death of Myspace revolves around the lack of corporate development and investment in the asset, but the larger factor was simply that the audience and trends moved on and that played a much larger role. Murdoch has been quoted as saying “we screwed up Myspace in every way possible” .
2007 – Google buys YouTube ($1.65 billion)
At the time the price tag seemed excessive. Ten figures for a video-sharing site with no revenue? Even in 2010 the YouTube purchase seemed dubious – revenue appeared to be behind schedule – but over the past 18 months YouTube within Google has started to make complete sense. Not only is revenue significantly increasing, but the dominance of YouTube as the home of video is strategically vital to Google as the home of search. YouTube has been integrated into multiple products and multiple platforms and is the dominant player in web advertising’s most lucrative category. In terms of Rankine’s key elements of M&A success, Google has played these all flawlessly.
2007 – Google buys Doubleclick ($3.3 billion)
Doubleclick was already an established, global business when it was purchased by Google. It was the leading advertising server in the world and had a significant client base of media publishers and advertisers. Based on that its $3.3 billion price tag was justified. The purchase price was 20 times revenues (compared to 100 times for Tumblr), but since acquiring it Google has made the tool more powerful and it has become a key foundation of its efforts in advertising technology and targeting, making it unrivalled in terms of technical expertise and market power in the space. Initial analysis was that the purchase was Google was playing catch up to other ad serving companies, however Doubleclick has thrived under Google and pushed the boundaries of what ad serving technology is capable of.
2007 – Microsoft acquired Aquantive ($6.4 billion)
At the time this seemed to make sense. Microsoft wanted to increase its clout in the web advertising world and bought the second largest technology provider in this space. Microsoft used Aquantive to build out the Drive Performance Network, and while that was a modest success the initiative couldn’t keep pace with Google. The Atlas ad-serving platform struggled against the dominance of Doubleclick and emerging innovation from Eyeblaster and Eyewonder. In 2009 Microsoft offloaded the Razorfish agency brand that was part of Aquantive to Publicis for $530 million, and ultimately sold the Atlas technology to Facebook for a small amount. What went wrong? With hindsight one could argue the logic behind the deal failed to make sense. And $6.4 billion was simply too expensive.
2011 – AOL acquires the Huffington Post ($315 million)
In the scheme of the above, $315 million seems almost cheap. Problem is, it really isn’t. AOL’s move to purchase The Huffington Post was widely applauded, a sign it was moving its focus away from a legacy ISP business to ad-supported media. With HuffPo it got the bluster of Arianna Huffington and a load of pageviews, the problem is to date the AOL media unit has not made any profit – in fact in the past two years since acquiring HuffPo it has lost $86.1 million. Does this mean HuffPo is a failed acquisition? It’s hard to tell but it is clear that so far it has not delivered the return most would have expected. This shows the danger of valuing an ad-supported media asset that isn’t profitable in a rapidly changing ad market – it’s entirely plausible that when HuffPo is neatly integrated into AOL the entire business model holding it up (display advertising) is completely changed.
2011 – Yahoo!7 acquires Spreets ($40 million)
At the time this was applauded as a great acquisition, Yahoo making a proactive deal to buy the most credible of the group buying sites at a time when group buying was considered to be highly lucrative. Yahoo integrated the business into the wider Seven Media group, using Pacific Magazines and Channel Seven as cross promotion vehicles. Despite this being done well consumers tired of group buying and, at the end of 2012, less than two years after it was acquired, Spreets effectively shut down and became an aggregator of others' group buying offers.
The core issue: a perhaps overzealous payment price combined with a lack of foresight over the inevitable burnout of consumers tolerance of the group buying model.
2011 – Google acquired Admeld ($400 million)
The price tag seemed big for a relatively unknown technology company operating in the emerging programmatic trading space. Google could see the future – it was programmatic and it was rapidly approaching – and made a bold play for Admeld. Nowadays Admeld has become the backbone of Google’s lucrative programmatic trading suite and has been positioned as the leader in the space, making Google the leader in search, video, display and programmatic. Within two years the vision has been realised.
Just what will we say about Tumblr and Yahoo! If the above is anything to go by, it’s best to wait. After all, it could be five to 10 years before we’re in a position to make an informed decision.