Think Jerry Yang, Yahoo! Inc.'s [
YHOO]
lame duck CEO, is chiefly to blame for screwing up the mother of all technology deals with Microsoft Corp. [
MSFT]? No sir. Fine, he played a starring role, but the deeper truth about Yahoo!--and one that the new boss will have to contend with--is that this is a company with a deeply dysfunctional record of M&A.
In the past five years
Yahoo!
has spent $4.7 billion on 15 acquisitions, purchasing another 27
companies over that time without disclosing a price. Yet since 2004 the
Internet giant has limped steadily toward oblivion. While Yahoo! was spending heavily on acquisitions, its annual
revenue growth was slowing dramatically, peaking at 120% in 2004 and
dwindling to 47.1% in 2005, 22.2% in 2006, 8.5% in 2007 and 5.8% this
year.As a result, its
M&A strategy must be adjudged, if not an outright failure, then at
least a disappointment.
Comparing Yahoo!'s results over this time to that of Cisco Systems Inc.,
for years the consensus leader among technology industry acquirers,
highlights the Internet company's weak performance. Since 2003, the networking giant has spent $14.7 billion on 43 deals. In
other words, despite being an even busier buyer than Yahoo!, with all
the peril that mergers entail, its financial performance has remained
strong. Over the past five years, Cisco had trailing 12-month revenue
growth of -0.2% in 2003, 16.8% (2004), 12.5% (2005), 14.9% (2006),
22.7% (2007) and 13.2% (2008). The company's average year-over-year
growth rate during this period was 13.3%. While Yahoo!'s comparable
growth rate of 45.6% is superior, Cisco, despite its much bigger size
and competing in a more mature sector, is today far and away the more
profitable, faster-growing company.
Obviously, companies in different sectors face different competitive dynamics, so such comparisons aren't entirely useful. But all companies are subject to one cardinal law of M&A: acquisitions should produce more value than they consume. Yahoo!'s deals fail this simple sniff test.
The biggest of Yahoo!'s acquisitions during the time period in
question was the 2003 acquisition for $1.6 billion of Overture Services
Inc., while in another major purchase Yahoo! bought French
comparison-shopping site Kelkoo SA in 2004 for $576 million. In
different ways, both deals were mistakes. Overture provided paid search
services, among other offerings, a business dominated by Google Inc. [
GOOG] Yahoo! put years of effort and millions of dollars into
developing a successor to Overture, called Panama, but Google has still
steamrolled it in paid search. Meanwhile, after Yahoo! this week agreed
to sell Kelkoo to a British private equity firm for less than $125
million, Kelkoo's former CEO said in a
blog post that the startup failed to
grow under its owner because of Yahoo!'s "inability ... to develop
itself in the transactional universe." Yahoo! leaders also do not know
how to manage a non-U.S. enterprise, he added.
Yahoo! officials acknowledge the purchase of Kelkoo didn't work out. And they say the service no longer conformed with the
company's strategy to focus on its properties, such as Yahoo!'s home
page, search, e-mail and MyYahoo!, that its users visit multiple times
a day. More broadly, they strongly defend Yahoo!'s acquisition
strategy, denying that M&A strategy has contributed to the
company's slowing growth.
"If you look at one of our largest acquisitions, Overture Services,
we've had a very substantial return on that investment," says Marta
Nichols, vice president of investor relations with Yahoo!. "We had not
been a principal in search, and now search is a very important business
for us.""We feel good about the acquisitions we've made," Nichols goes on to say.
Yet this very preoccupation with search -- driven by Yahoo!'s
fixation on competing with Google -- itself deserves scrutiny. Yahoo!'s current travails owe largely to its failure coming up
with innovative, and profitable, ways to compete in search. It compounded the error by continuing to make acquisitions to support the business, even
as Yahoo! was evolving into a company focused on providing online
content and services. Worse, by fighting on too many fronts, the company's dealmakers had to purchase a broad range of companies, rather than focusing on the few areas where Yahoo! could lead.
Over time, M&A generally works best when it's hitched to a few strong horses all pulling the wagon in the same direction (one reason why few conglomerates endure). Yahoo!, in at least trying to outsource search, cutting its losses on Kelkoo and unplugging other weak products, appears finally to be wielding a tighter rein. The new CEO will have to speed that process. --Alain Sherter
See Nov. 17 post about Jerry Yang's stepping down as Yahoo! CEO from Tech ConfidentialSee Nov. 21 post about Yahoo!'s sale of Kelkoo from Tech ConfidentialSee Nov. 5 post on the DOJ blocking the Yahoo!-Google ad deal from Tech Confidential
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