Monday, May 27, 2013

Yahoo-Tumblr : Here We Go Again?

Yahoo recently announced a $1.1B acquisition of Tumblr.  Marissa Mayer, their new CEO, is seeking a transformational acquisition of a young, fast growing social blogging network to energize her slow growth media firm whose business model is under question.

As mentioned in my April 14, 2013 post “May the Odds Be withYou” large transformational acquisitions by new CEOs seeking to make a reputation for themselves are dangerous. (Mayer joined Yahoo in July 2012 from Google). They usually succeed in making their reputation. Unfortunately for their shareholders, it is not the one they intended. Leo Apotheker stands out as the poster boy of such follies with his disastrous HP-Autonomy acquisition. CEOs in general, and especially new CEOs, would be better served addressing core business model issues before trying to cover them up by embarking on risky acquisitions. Mayer may be hoping to replicate Google’s successful YouTube acquisition. Nonetheless, hope is never a good strategy. Additionally, there are some significant Tumblr questions which need to be addressed.

The first is the price question. Tumblr burned through $25MM of cash last year on just $13MM of revenues. Analysts estimate Tumblr needs to grow quickly to $1B in revenues with 10%+ profit margins just for Yahoo to breakeven. That is very aggressive. Keep in mind Tumblr experienced difficulty in its latest round of venture capital funding. Also, allegedly, Tumblr tried unsuccessful to sell itself to Microsoft, Facebook and Google. So I think part of the Yahoo bet is to gain access to Tumblr’s “unduplicated audience of users” that can be integrated with Yahoo i.e. 1+1=1000.

Both the growth and integration synergies require flawless execution. Yahoo’s acquisition record, however, suggests this may be a challenge. Its 1999 $3B Geocities acquisition ceased operations in 2009. Other acquisitions like Overture and Flickr have yet to pan out. Also, Tumblr users have expressed concerns over the transaction and threatened to leave the site.

Recognizing these issues, Yahoo has promised not to screw it up-their words not mine!  You know you are in trouble when you have to make statements like this.  Yahoo plans to keep Tumblr separate from Yahoo to retain Tumblr users. The problem is, if Tumblr is kept separate, how can you achieve the required integration synergies needed to justify the acquisition premium? This raises the question of whether Yahoo is the best owner of Tumblr - defined as being able to extract the highest value from Tumblr.

It usually takes two years before you can judge the success of an acquisition. Nonetheless, it looks like Yahoo massively overpaid for a company that will be difficult to integrate by an eager new CEO. Yahoo’s board approval of the transaction raises additional governance concerns. This suggests a bumpy road ahead for Yahoo.

p.s. Yahoo is also reportedly a bidder for Hulu, which has already received a formal $500MM News Corp. offer. If true, Yahoo would be entering an auction for another major transformational acquisition. This increases both the odds for over paying and greatly complicates execution and integration concerns should Yahoo’s bid succeed. What is the board thinking in supporting this action? Start shorting Yahoo’s stock. They look like they are trying to replace HP as the new serial acquisition value killer.

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