Tech giants are finding lots of bolt-on acquisitions to splash out on

Tech giants are finding lots of bolt-on acquisitions to splash out on

May 25th 2013 | SAN FRANCISCO |From the print edition

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BLOGGERS worried that Yahoo could stifle the youthful, rebellious spirit of Tumblr, a blogging service that it bought for $1.1 billion on May 20th, might want to keep an eye on whether Tumblr’s boss, David Karp, is asked to tone down his language. In a message on his firm’s staff blog this week, Mr Karp stressed that the deal with Yahoo would leave Tumblr with plenty of independence—“We’re not turning purple,” he wrote, referring to the corporate colour scheme of its new owner—before signing off with a distinctly uncorporate: “Fuck yeah, David.”

It is not surprising that Yahoo’s purchase has unnerved many Tumblr users. After all, the internet giant has a record of buying promising young tech firms such as Delicious, an online-bookmarking service, and GeoCities, which hosts websites, and then neglecting them. The rich price paid for Tumblr, which reportedly made just $13m of revenue last year, is also fuelling doubts about the deal. According to an estimate by John Saroff, a former Google executive, Tumblr would need to generate at least $108m of revenue a year to return more than the opportunity cost of the capital that Yahoo is tying up in it.Why is Yahoo willing to take such a risk? Part of the answer is that, like an ageing rocker, it hopes being associated with younger stars will make it look cool again. It is also hoping to emulate Google, which snapped up YouTube, a video site, in 2006, and Facebook, which swallowed Instagram, a photo-sharing service, last year. The firms were criticised for paying too much for targets with scant revenues. But both deals now look like winners. Instagram, for instance, has seen its monthly users soar to over 100m, up from around 30m when Facebook bought it.

These and other acquisitions, such as Amazon’s recent purchase of Goodreads, an online book-recommendation service, involve taking a young, fast-growing web “platform” and bolting it on top of an older, bigger one. The newcomer is allowed to operate fairly independently. The parent sends traffic to it and helps in other ways.

Tumblr is already a sizeable platform, hosting 110m blogs and 51 billion posts. Yet the firm has made little effort to make money from its bloggers’ musings and funny pictures of cats. Yahoo is betting it can bring more users to Tumblr and apply its own advertising-sales expertise to help it mint money. In return it gets a youthful audience of over 300m users a month. Many use Tumblr’s mobile app, boosting Yahoo’s presence on smartphones.

Internet bankers say more platform-on-a-platform combinations are likely, for several reasons. First, the web’s giant firms are awash with cash, and itching to spend it (see chart). Second, some start-up founders would rather sell their businesses than deal with the hassle associated with floating them on the stockmarkets. Third, there are plenty of small but promising new web platforms to be bought. Facebook is said to be wooing Waze, a traffic-and-mapping service with 48m users. Earlier this year Pinterest, a social network that lets people “pin” images to online bulletin boards, was valued at $2.5 billion in a venture-capital fund-raising.

Still, grafting one platform onto another is a delicate operation. Quincy Smith of CODE Advisors, an investment bank, says Google’s success with YouTube shows such deals can pay off handsomely. But he notes that they “often have the highest risk of organ rejection”.

Yahoo is determined to make its Tumblr transplant work. Marissa Mayer, the web giant’s boss, promised this week that it would not “screw up” the business. But to justify the handsome price, Yahoo will insist that Tumblr turn much more of its content into cash. That could upset Tumblr’s users, some of whom took to blogs and other social media this week to express their unhappiness. It could also lead to friction with Mr Karp, who has made little secret of his disdain for most forms of online advertising.

He and Ms Mayer claim they are confident of finding new, less intrusive ad formats, but these may not generate enough to get near that $108m a year revenue target. And Yahoo’s efforts to boost Tumblr’s revenues will be complicated by the fact that as well as lots of cute cat pictures, Tumblr also plays host to numerous explicit blogs. Their content, while no doubt a big magnet for traffic, is unlikely to appeal to mainstream advertisers.

An even bigger risk has been largely overlooked. Having pledged so publicly to make the Tumblr deal a success, Ms Mayer and her team will be tempted to spend less time on Yahoo’s other businesses. Yet many of these, such as Flickr, a photo-sharing service that got an overhaul this week, badly need more attention. Too much focus on a single platform could hamper a Yahoo turnaround.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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