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.
J
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.
J
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