I’m not sure I feel great about the idea of Yahoo! (Nasdaq: YHOO ) going on an acquisition binge after some years of a noted muted-ness in the M&A market, but according to one company executive, Yahoo! is ready to do just that. Steven Mitzenmacher, a senior director of corporate development, acknowledged the recent lack of acquisitions at the Global Technology Symposium last Friday. However, he said the company was ready to become more active and that it would “come out now ... guns blazing.”
If past deals are any indication …
While acquisitions make sense for most companies that have a ton of cash and are having a difficult time growing organically, Yahoo! isn’t quite in the class of a company like Oracle when it comes to this type of growth. In fact, Yahoo! is not even close. Yahoo!’s largest acquisition came in 1999, when it paid $5.7 billion for broadcast.com. That same year it also acquired GeoCities for $3.57 billion. Enough said!
Smaller acquisitions haven’t fared much better, as its recent attempted fire sale of other failed purchases like Delicious show. Sure, we have seen managements come and go, but making strong acquisitions has just as much to do with a company’s culture as it does its management team. I do like Carol Bartz much more than most pundits, but even I am a little worried about what the company might do with its cash, especially when executives are using terms like “guns blazing.”
A better investor
On the other side of the coin, Yahoo! has actually made its best business moves when acquiring smaller minority stakes in companies. For evidence, look no further than its 40% position in China e-commerce leader Alibaba. This investment may be worth more than Yahoo!’s own core assets alone, which is why I have recommended the stock.
Recent Chinese Internet IPOs like E-Commerce China Dangdang (NYSE: DANG ) and Youku.com (NYSE: YOKU ) continue to garner extremely frothy valuations, despite the former being barely profitable, and the latter being highly unprofitable. Last week Qihoo 360 Technology (NYSE: QIHU ) , another Internet-based Chinese company, came online at the New York Stock Exchange. Its stock is now more than double its IPO price. Qihoo is the maker of China’s second most popular Internet browser, trailing only Microsoft‘s (Nasdaq: MSFT ) Internet Explorer. While revenue growth appears to be accelerating at Qihoo, it only became profitable in 2009 and operates in an increasingly competitive environment.
So what is Yahoo!’s stake in Alibaba worth? Alibaba operates the highly profitable and rapidly growing e-commerce site Taobao.com in addition to an online payment platform called Alipay that is now larger than Paypal. I would argue the stake is worth a lot more than investors are currently valuing shares if these recent IPOs are an indication.
I don’t necessarily think that means that Yahoo! should just close up shop and act as a holding company, but I also don’t think now is the right time for the company to go “guns blazing” into new acquisition opportunities. Google (Nasdaq: GOOG ) made nearly 50 acquisitions in 2010 alone, but even Bartz has acknowledged that Big G isn’t really in the same league in terms of competition anymore.
Bartz and her team are still working overtime to get the businesses Yahoo! already operates in order, and at this point hitting a bunch of singles may still be a better strategy then swinging for the fences at every pitch. Yahoo! finally seems to be growing some traction in its core businesses and is again innovating, making its Web portal a more relevant source for finding content on the Web as well as its own sites. I believe Bartz needs to maintain the company’s focus on its own organic growth while she continues to work with SoftBank and Jack Ma of Alibaba to get the maximum value out of the company’s most important Asian investments -- particularly Alibaba. Perhaps this might make Yahoo! a more intriguing acquisition target itself.
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