Monster Acquisitions Rarely Deliver
Here are the largest acquisitions from several technology players.
| Company | Acquisition | Price |
| Microsoft | Skype | $8.5 billion |
| Motorola | $12.5 billion | |
| $1 billion | ||
| Yahoo | Broadcast | $5.7 billion |
Yahoo acquired Broadcast — an internet radio company — in April 1999. The service has since been discontinued, having failed to provide Yahoo! Inc. (NASDAQ:YHOO) with any tangible benefit. Worse yet, the deal carried an enormous price tag, at more than $10,000 per Broadcast user.
In contrast, Microsoft Corporation (NASDAQ:MSFT)‘s acquisition of Skype has been one of the industry’s more successful purchases. At the time of the acquisition, Skype was bringing in over $800 million in annual revenue from 170 million users. Microsoft doesn’t disclose Skype’s exact financial figures, but Skype does have more than 250 million users today. If the revenue-to-user ratio has stayed the same, then Skype now brings in over $1.2 billion.
Many analysts believe that Microsoft succeeded with this acquisition because it kept Skype autonomous. This is very different from Microsoft’s failed aQuantive acquisition. Six years after spending $6.3 billion for the company, Microsoft recently sold the last piece — Atlas — to Facebook, likely for less than $100 million. The rest of aQunative has been written off as a loss. A major problem was Microsoft’s desire to integrate and change aQuantive’s mission from display ads to search ads, despite aQuantive’s previous success with the former category of ads.
Having seemingly learned its lesson, Microsoft has allowed Skype to continue to grow and develop on its own, with Microsoft’s backing.
Two acquisitions that leave investors guessing are Google Inc (NASDAQ:GOOG)‘s acquisition of Motorola Mobility and Facebook Inc (NASDAQ:FB)‘s buyout of Instagram. There are rumors that Motorola may be behind Google Inc (NASDAQ:GOOG)’s planned smart-watch, having filed for three new related patents. And it is also rumored that Instagram may one day run ads in a Facebook-ish way, in an attempt to monetize Instagram’s 100 million users.
Both acquisitions are relatively recent, and their benefit has yet to be seen. But right now, Motorola has failed to deliver an iPhone killer as hoped, and Instagram has yet to make a dime. Neither acquisition seems worthy of its respective price tag.
Yahoo! Inc. (NASDAQ:YHOO)’s potential Tumblr acquisition could be the best billion it ever spent, or a complete waste. Major acquisitions frequently fail to live up to their hype. As of this moment, a successful Tumblr acquisition is far from a sure thing. I would suggest that Yahoo! shareholders hope for something much more important.
A More Promising Prospect
Yahoo! has struggled to stay relevant for much of the past decade, and has searched for growth catalysts in things such as video email, a merger with AOL, and rehiring of founder Jerry Yang.
Marissa Mayer was made CEO of Yahoo in July of 2012. So far, she may be the best acquisition the company ever made.
YHOO Net Income TTM data by YCharts
There has been an enormous profit upswing at Yahoo since Mayer took the wheel. In the most recent quarter, although revenue decreased, the company’s profit was up 36%. But upon further digging, it was revealed that 56% of Yahoo’s profit came from Alibaba and Yahoo! Japan – not from Yahoo! Inc. (NASDAQ:YHOO) itself. To have true profit growth, Yahoo! needs a plan.
Mayer wants Yahoo! Inc. (NASDAQ:YHOO) to acquire young startup tech — like activity recommendation app Stamped and restaurant recommendation app Jybe — and bring them into the fold. If you were to look at the price tag each acquisition has carried, and then to look at the revenue potential from each acquisition, you will begin to wonder whether these acquisitions will pay off in the end. But Mayer’s isn’t trying to acquire businesses; she’s trying to acquire talent.
Mayer’s stated goal is not to integrate these businesses into Yahoo!’s business. The majority have been shut down after their acquisition. Mayer wants their people. Her plan is to get great people first, and have those great people create great products. This strategy has its pros and cons.
The Good and The Bad
On the plus side, Mayer recognizes that Yahoo! has to do something fundamentally different if it is ever going to survive as a company.
YHOO Net Income TTM data by YCharts
Yahoo hasn’t really gone anywhere since the dot-com bubble burst, and something has got to change. The company simply must do a better job at offering quality products, which is why Mayer’s committed to bringing in quality people.
The downside to this strategy is it admits that Yahoo! lacks talent in-house. But with over 10,000 employees, it seems unlikely that Yahoo! is completely lacking in gifted individuals. Instead, it is more likely that Yahoo! has not created an environment where talent can develop.
Google thrives on developing talent. Google Inc (NASDAQ:GOOG)’s VP for corporate development says “Google provides…a vision that tests most entrepreneurs to think bigger than they ever have before.” Google employees get to spend 20% of their time working on a special project of their choosing. This allows budding talent to develop, and lets visionaries hatch new ideas. The Adsense network that drives most of Google’s revenue today reportedly originated with the 20% perk. Can you imagine the company without that innovation?
There’s another difficulty with the strategy of acquiring start-up app developers. Currently, there are more than 150,000 developers for Apple Inc. (NASDAQ:AAPL)‘s IOS and close to 100,000 for Android. Yahoo! Inc. (NASDAQ:YHOO) has acquired 10 of these developers so far. How do you effectively identify the winners among such a crowded market?
Conclusion
It’s wonderful that Mayer realizes that Yahoo! has a big need for a new plan. But acquisitions — even a Tumblr acquisition — aren’t that promising unless the parent company has initiatives to foster employee creativity. Rather than waiting for news on new acquisitions, I’m going to listening to what Mayer has to say about how she is going to develop the talent she has, and any new talent the company might acquire. Only then will Yahoo! be positioned to deliver over the long haul.
Yahoo! has struggled to stay relevant for much of the past decade, and has searched for growth catalysts in things such as video email, a merger with AOL, and rehiring of founder Jerry Yang.
The article What Yahoo! Needs Even More Than Tumblr originally appeared on Fool.com and is written by Jon Quast.
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