This article is written by Danie Joseph, pursuing Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from Lawsikho.
Table of Contents
Companies who visualise potential growth in a sector or market undertake various strategies to materialise this potential. A particular strategy is mergers and acquisitions which allows companies to meet the expansion objectives and allows for diversification of risk. Over the years there have been various successful acquisition deals that have fulfilled these particular objectives. The conventional objective of an acquisition strategy enables companies to enter into newer markets, establish a dominant presence in their respective competitive sphere and increase the profitability of the company by merging or acquiring a company that has a competitive presence and large potential to grow. However, during this vital process, it is necessary to identify the pitfalls that one could overlook in this particular process. Sometimes both the parties would majorly focus on the completion of the deal just based on the merits and do not take into consideration various factors that revolve around the deal which consequently lead to its failure. Such is the case of the acquisition of Tumblr by Yahoo for 1.1 Billion U.S Dollars in 2013 which brings into perspective an acquisition that went wrong due to particular reasons. Hence it is important to realise the reasons why such a promising deal failed to live up to expectations and this would help to frame a concrete strategy to ensure a successful merger or an acquisition.
The current market situation of Yahoo and Tumblr
Yahoo is an American company made by Jerry Yang and David Filo which was established in 1994 and is headquartered in California. It primarily provided a web service and a search engine and web portal and provided internet services related to it. However, over the years, Yahoo’s user base declined dramatically when users switched to a more prominent search engine called Google which was preferable to most users which is evident from its large share in the search engine market. In order to attain growth and reignite the competitive edge over the market, it adopted the strategy of acquiring companies that had a huge potential to grow and a large user base to channel this growth. Yahoo sought out target companies in order to establish their social network segment and identified a blogging site called Tumblr.
Tumblr was a social platform for bloggers and due to its democratized system and independent nature, it increased in popularity. The blogging platform was so popular that it garnered over 72 million users on it every month as of 2011. Yahoo purchased Tumblr in the year 2013 for a complete cash deal for an amount of USD 1.1 billion which was approved by the board at Yahoo. The deal was made on the backdrop of re-instilling Yahoo’s relevance in the industry, it viewed Tumblr as the pathway to increase its traffic and user-base on all its platforms and also viewed it as a revenue generation tool by implementing advertisements on Tumblr. However, this was clearly one of the main pitfalls of the deals as Tumblr ethos did not align with the intention of Yahoo as it did not intend it to generate revenue through ads on its platform and this was clear as it had only procured a very negligible amount through advertising. It was evident for multiple reasons that Yahoo did not completely understand the target company and subsequently led to the failure to recognise their massive investment of USD 1.1 billion.
Analysing the reasons which led to the failure of the acquisition
1. Underestimating the importance of proper due diligence
From the events that transpired after the acquisition, it was clear that Yahoo had not conducted the necessary due diligence before executing the acquisitions. One of main reasons why most acquisitions deals fail to realise its potential is due to the poor standard of executing effective due diligence. Conducting the necessary due diligence highlights the potential loopholes and risks of the concerned target company and also the potential benefits of the merger or acquisition. Yahoo tried to force the deal based on the merits of the deal which was clear from it over-estimation of the value of Tumblr of upto 1.1 billion USD which was sold for 3 million USD in 2019. Furthermore, the lack of due diligence also hid the fact that the concerned target company, Tumblr, was not optimized for an advertisement generation revenue model and lacked any latent innovative potential. Therefore, this was one of the main reasons that led to a deal that was considered a lost opportunity.
2. Work – culture differences
Yahoo was perceived as an aging social media platform compared to a more refined, modern Tumblr and this was even reflective of their respective work-forces. It was clear that there was a substantial work cultural difference between the two however this was not contemplated enough and led to the initial stages of the failure of the acquisition. Yahoo, with the sole focus of integrating ad-generation into Tumblr, merged the sales team of Tumblr into the company without perceiving the work culture needs and how to resolve the differences. In addition, the unfamiliarity with corporate culture norms and beyond reasonable sales expectations set by Yahoo resulted in the discontent between the two workforces caused by differences in the work culture which led to a hike in employee turnover.
3. Absence of a definite, comprehensive plan
Google, Facebook were some of the direct competitors to Yahoo and also made acquisitions such as YouTube and Instagram respectively however they comparatively made phenomenal growth and profits on their investment and this was due to a well-planned strategy to harmoniously integrate their services to the utmost benefit. However, with the case of Yahoo, there was a lack of a well-defined and comprehensive plan. A simple but consequential mistake during acquisition deals is that both parties are focused on finalizing the deal as soon as possible and do not give importance to issues that subsequently arise once the deal-making process is over. In this particular case, Yahoo was unable to establish advertisement revenue methods through Tumblr for which the acquisition was mainly intended and also did not refine the user experience on the Tumblr platform which caused dissatisfaction among the users and also failed to innovate the services.
How to ensure M&A Deal is successful
1. Conducting the requisite standard of due diligence
It is important to ensure that the necessary due diligence is conducted during the acquisition deal and to highlight the various potential issues and evaluate the probability of the successful implementation of the company after the deal. Overlooking this step can turn a promising deal into a failure. The due diligence involves an assessment of latent risks relating to assets, the possibility of infringement of intellectual property, the status of employment conditions, contracts of the company. Conducting due diligence provides a view into unforeseen liabilities such as pending litigations, high level of unpaid debt obligations, etc., and also provides the scope to assess a fair value estimation of the company with respect to its finances and revenue generation.
2. Tackling cultural differences
In order for an acquisition to be successful, apart from the deal itself, one has to evaluate the post-integration of the deal itself. A company’s workplace culture can be identified through the company’s management norms. There may be varying workplace cultures and it is vital to ensure both the cultures can align without being costly in terms of money and time. In order to work out the differences, it involves anticipating the requirements of the contrasting working environments beforehand during the due-diligence phase. A careful evaluation of the unique processes, key employees, crucial projects etc. and framing an efficient strategy which should be implemented after the period of finalising the deal. However, despite taking the necessary prerequisites, it is common to observe certain cultural barriers or differences in such deals, however, their impact should not be that which is of significant detriment to the plans of the company.
3. A well-framed plan and strategy for its implementation
Successful integration between the companies will result in the growth of the company thereby resulting in a successful deal all around however if the integration is laden with various issues then it can be a costly investment for the company resulting in a higher attrition rate amongst the employees and hindering the prospective growth of the company.
During the process of incorporating the deal, it is important to have comprehensive discussions regarding a coherent and definite strategy of amalgamating the acquired company with the purchaser company. This will primarily lay down the framework on how all the parts of the organization operate seamlessly with the newly acquired company. Failure to anticipate the various issues and frame a concrete plan to ensure its integration can lead to various issues which will prevent them from realising their true potential. These issues include external market factors, inaccurate revenue projections, cultural factors, etc. Despite being one of the obvious and simple steps to ensure a successful acquisition, one of the common reasons for M&A deals to fall through is due to the disregard for a well-defined strategy.
It is clear if the aforementioned factors are not discussed and taken into consideration it will cause M&A integrations to fail. In cases where such mergers or acquisition deals fail, it could arise due to the fact that both parties are heavily concentrated on the completion of the deal that they fail to perform their basic duties and inspect the post-merger integration of the concerned target company. Therefore, from the Yahoo and Tumblr acquisition which resulted in a failure as Tumblr was sold a couple of years later for a meagre 3 million USD an inference can be made as to the significance of conducting the necessary due diligence and apprehending the issues and risks that are bound to arise and plan a defined and coherent strategy for the post-merger integration. This would maximize the probability of success of the deal and facilitate the rise in growth and revenue.
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