The first wave of Web brands died during the Nuclear Winter of 2001-03: Excite, Lycos et al. were all fantastically strong brands and companies in the late 1990s, but they are all nowhere to be seen amongst the digital media elite. The main argument was that Excite and Lycos - purveyors of the first search engines - all fell in love with portaldom and turned their backs on search.
Search vs. Portaldom
Those who survived, it’s not a coincidence, are those who invested in search: Google, of course, being the leader. But also Yahoo! (it did invest to acquire Inktomi and Overture, albeit belatedly) and IAC, who plunked down $1.8B for Ask Jeeves.
But 2007-08 is ushering in an era where even some those survivors are not going to make it.
- Yahoo!? About to be swallowed by MSFT. It might not disappear, but its future remains uncertain.
- IAC: a mish-mash of brands, maybe, but with Jeeves the butler being kyboshed, it now looks like Ask.com will also be remade as a powered-by-Google search engine.
- Netscape (not a search engine but a browser and portal): AOL pulled the plug on that last year.
Google vs. Yahoo! - How Yahoo! Lost the Web
The Mercury News has a fantastic article on how Yahoo! lost to Google here. I have covered Yahoo!’s misguided decision to power its search with Google as a catastrophic and ultimately fatal move.
Is YouTube to MySpace what Google was to Yahoo!?
As I was writing this, I wondered, if video is indeed where search was in 2000-02 (depending on who you ask and what metric you use), then could Yahoo!’s decision to use Google akin to how MySpace helped grow YouTube by not blocking YouTube embeds on the massively large social networking site (disclosure: WatchMojo.com provides content to both YouTube and MySpace TV).
In all fairness, that’s an unfair question: MySpace is not really directly competitive to YouTube, they were then complementary services. Only since MySpace launched MySpace TV did it compete head on with YouTube. But YouTube has since Day 1 been as much as social networking as it has been about video. In fact, both MySpace and YouTube remain communities.
So in that context, while MySpace remains the largest social networking site in the world, YouTube’s lead as the largest video file sharing community continues to grow. Are these two companies diverging or converging? Is MySpace competing with Facebook (a social network) or YouTube (an entertainment community centered around video)? Oddly enough, if you ask Facebook, they would say they are competing with Google, and not MySpace.
I wonder, over time, will MySpace’s decision to not block YouTube embeds go down in history the way Yahoo!’s decision to help Google does today?
My guess: probably not: MySpace is part of News Corp. now so its future success is all-but-guaranteed. I also think that the strategy of the two companies is different enough for both of them to carve out significant pieces of the pie.
But the fact that Google owns YouTube and is partnered with MySpace by way of the massive $900M ad deal is not short in irony. How so?
Well, Google ended up owning YouTube. So not only did it trump Yahoo! but it also owns the company that poses a threat to Yahoo!’s supremacy in video advertising. YouTube generates 1 out of 3 streams online.
But moreover, in owning YouTube and powering ads on MySpace, Google is in fact the ad network most exposed to social media… What is really odd is that with email being the ultimate communications tool and My.Yahoo being the original launch page… this is really a market that Yahoo! should have owned.
As we hear that Yahoo! will enable videos on Flickr, I cannot help but think how badly Yahoo! story has ended (or, I guess, will end). Why the Flickr story is relevant here, frankly, is that Flickr + del.icio.us (another unit of Yahoo!) = YouTube. See more on that here.
With a few bounces going the other way, Yahoo! could have been Google + MySpace + Facebook + YouTube, but instead, it will be a subsidiary of Microsoft sometime in 2008.
History has a very funny way of unfolding, doesn’t it?
Disclaimer: Long - albeit lighter - on Yahoo!
The following is a perpetual-work-in-progress. Once you start to compile a list of mergers and acquisitions, you realize why it’s nearly impossible to have a complete list. We are quite confident that the following is a very good, comprehensive list of the largest, more notable deals… but it is not - and no list will be - fully complete because there are too many countries around the world and too many industries to report (it is highly possible that the Wall Street Journal or Financial Post, for example, has such a list… but it would be thick and unwieldy).
We have included:
- many industries
- have not adjusted for inflation
- mergers (be it all cash, cash/stock, or all stock)
- acquisitions (we have excluded partial acquisitions)
- private equity deals.
It is certainly not complete, send me any ones you think I am missing or industries you want us to add next to ash@mojosupreme.com or leave in the comments.
Trivia:
- In 1981, when DuPont acquired Conoco for $7.8B, it was the biggest deal of all time. But adjusted for inflation, that remains a $20B deal by 2008 standards.
- KKR’s private equity deal for KKR remains the biggest buyout when adjusted for inflation, but in actual dollars it has been long surpassed.
Related on HipMojo.com:
You do not need a CFA to realize that Yahoo! is an undervalued company. Yes, the company once synonymous with the World Wide Web is now facing numerous challenges, but between investments in Alibaba, Yahoo! Japan, a myriad of recently acquired US-based properties (Flickr, Delicious, etc.), the company is worth more than $32B.
But, tell that to Wall Street investors and analysts who keep pegging Yahoo!’s growth (or lack thereof) to Google’s and end up favoring the search leader.
Reading up on John Battelle’s predictions for 2008 - in which he forecasts AOL’s Platform A being spun off - I wondered, should Yahoo! bundle its Yahoo! Network and spin that off too to unleash shareholder value?
Step 1: Defining the Networks
First, some clarifications:
- AOL Platform A is basically all of the disparate ad networks Time Warner has bought over the years, and include: Advertising.com (which we included in our Top 10 M&A Web Deals of All Time), along with TACODA, Third Screen Media, Lightningcast and ADTECH.
AOL’s decision to create Platform A is interesting: it repositions AOL.com - once a walled garden sheltered away from the anything-goes sites and pages of the world wide web - to a network outside of AOL.com, and this just a couple of years after AOL.com relaunched and became an open, free portal. This is very bold and brave from Time Warner, but leveraging Advertising.com, which is the largest ad network on the Web, could make this a success.
- Yahoo! has hysterically been all about the Yahoo! Property: the billions of pages generated on Yahoo!, Yahoo! Finance, Yahoo! Games, Yahoo! Mail, etc. But seeing Google extend its reach online and reach 76% of US users (via AdSense/AdWords) gave Yahoo! an incentive to open up.
This opening up came in a few ways, for one, it did not automatically rebrand companies it bought, namely Delicious and Flickr.
Second, it decided to reposition the Yahoo! Publisher Network and begin repping ad inventory on newspaper sites. These give Yahoo! valuable ad placement on premium sites, something that helps boost Yahoo!’s ad rates by offsetting the long tail of Yahoo! less-than-desired inventory.
Step 2: Buy Networks - Yahoo!’s Recent Acquisitions
But taking this one step further, this past year Yahoo! bought Right Media - an ad exchange - and Blue Lithium.
While Yahoo! paid $300M for Blue Lithium and an eye-popping $725M for Right Media (investing $45M for 20% at a valuation of $225M and then buying the remaining 80% for $680 at a valuation of $850, or a weighted average of $725M), I do not think Yahoo!’s stock will realistically project the value these networks represent. Yahoo!’s stock price will reflect the incremental gains these networks create for the company, but the value these networks have from a capital gain perspective is clearly not captured in the stock.
Step 3: Spin Off the Networks
If I were Yahoo!’s board, CEO or CFO, here is some financial engineering I would consider doing: I would essentially bundle all of the “non-Yahoo property businesses” (so effectively the network business) and spin it off into a separate company.
Step 4: Raise the Money (But How Much Money?)
Method #1
Yahoo! would remain a major shareholder, but by selling a portion of this entity, it could raise a lot of money to compete for deals against Microsoft and Google, who respectively have $19B and $13B in cash. Yahoo!, by comparison, has a paltry $1.5B.
The Yahoo! Network generates well over $100M in annual revenues - the psychological threshold for revenue requirements in an IPO - because Blue Lithium alone did $100M in revenues in 2007 (at least according to a story in Business 2.0 back in 2006, which we covered in this post). Add on Right Media’s revenues, the revenues generated by the newspaper consortium, and all other network-based businesses, you are looking at revenues for the Network business at anywhere from $200M to $500M in revenues. Frankly, the level depends on how you define and separate Yahoo!’s Network business. Using a mean of $350M, we can start to see what value Yahoo! can unleash, if any.
Doubleclick - ironically not even an ad network anymore - got $3.1B in an M&A for $300M in 2006 revenues. So using a Price to Sales ratio (P/S), Yahoo!’s Network would be worth $3.5B, or just over 10% of Yahoo!’s current market cap. If Yahoo! sold 50% of that to the public, it could raise some $1.75B, which would incidentally double its cash hoard.
Method #2
If we wanted to use a Price to Earnings ratio, then we need to keep working a bit.
Ironically, while networks are low-margin businesses (related: why are ad networks such low expectation mofos?), ad networks have better margins than content sites. Yahoo! is not a content site, granted, but it is a media company, so we can confidently say that Yahoo! Network would provide better margins than Yahoo!
Yahoo!’s margins are 10% or so, I think the Yahoo! Network business can garner margins of 25%, if not more. With $350M in revenues and margins of 25%, this means EBITDA of $87.5M. To keep things somewhat simple, we’ll use Yahoo!’s P/E which is 45.
Doing the math the second way, Yahoo! Network would be worth roughly $4B. Selling half of it to the public would add $2B to Yahoo!’s warchest.
Anyway you dice it, Yahoo! Network could effectively:
- reap the same benefits from their recent acquisitions
- simplify the story to Wall Street
- unleash shareholder value
- raise money for acquisitions
Any takers?
Long: YHOO
Apparently, Flickr’s images, which Yahoo! bought back in is finally being indexed in Yahoo! images. That’s surprising. You’d think all things Web 2.0 would seamlessly mesh into one another, but apparently, not so.
I was always very disappointed (in hindsight) as a Yahoo! shareholder that YHOO did not integrate Flickr’s sharing capabilities with Delicious’ tagging and unleash the mutant that would spawn out of that into what went on to be YouTube (YouTube was after Delicious + Flickr for video) but seeing this explains why they never did.
Lesson for M&A guys: the theory is grand, but implementing it is not so obvious.
Om Malik asked me what I thought of Yahoo!’s decision to focus on Flickr and effectively fold Yahoo! Photos into Flickr.
What do I think? I have been focusing on YHOO/MSFT’s rumored hookup and following the stock all day. And all of this in between actually running a business.
But here’s what I think of Yahoo’s Flickr decision:
It’s a sign of Yahoo! maturing, in the literal and figurative sense. Yahoo! has a tendency to come in, change the color to purple and rename things, think eGroups to Yahoo! Groups, Broadcast.com to… well, forget that one.
When IGN was looking at various sale options, they hated thinking of Yahoo! because they knew IGN would become Yahoo! Video Games, for example.
With Flickr in particular, recall that Yahoo! initially tried to enforce Flickr users to sign in with Yahoo! user names and that backfired.
Naturally this is the right thing to do because
a) Flickr is real strong and has a great brand equity…
b) But more importantly, it shows that Yahoo! is interested in business in lieu of cultural bullshit… had Yahoo! not spent so much time trying to force people into signing into Flickr using Yahoo! accounts, who knows, maybe they would have united Flickr with Delicious and added video sooner and what went on to become YouTube would have been under Yahoo!
Yeah, food for thought.
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