I'm amazed how those who don't truly understand the inner workings of business transactions can recklessly launch criticism as if they were a fly on the wall during negotiations. I read an article recently, "Yahoo! Is Still Dumb Money Even Under Marissa," where Forbes contributor Roger Kay took issue with Yahoo!'s (NASDAQ:YHOO) $30 million deal for Summly, a news summarization specialist.
You think you know, but you don't
Kay began his rant saying, "I can hardly believe that the new CEO over at Yahoo! thinks she's solving a problem by paying a reported $30 million for start-up Summly. ... What are the possible motivations for buying Summly?"
Immediately, I thought of several possible reasons why this deal made perfect sense. Not the least of which is that Yahoo! is in the content business. Yahoo! distributes all sorts of media for free and recoups these costs through advertising with the hopes of making a profit. Now, here arrives Summly, which scans content from websites such as Yahoo!, and with Summly's mathematical algorithm, Summly can produce summaries/outlines of the news that readers can easily grasp.
It sounds like a great idea. But not if you're in the content business. Summly is arguably a great threat to sites like Yahoo! and Google. Essentially, the growth of Summly would signal declining reader engagement, which could result in less ad revenue since readers wouldn't have the need to stay on any particular page longer than they need to. Why would they if Summly can produce a shortened version in seconds?
Unfortunately, Kay failed to make this connection. Instead, he focused on the fact that Yahoo! acquired what was (in his opinion) "a license." He then criticized the costs of the deal, which, at $30 million, is less than 1% of Yahoo's $4.1 billion in cash. Disappointingly, Kay discounted what this deal might have actually meant to Yahoo's business and rushed to call it dumb, when in fact, it was a brilliant strategic move.
From bad to worse
Astute investors should understand that whether or not Yahoo! figures out a way to incorporate Summly into its business matters very little. If it does, great! But Yahoo! (at least for now) just eliminated a potential threat, while at the same time, acquiring the talent that can help Yahoo! avert these sorts of threats in the future. Once I realized Kay was unable to look beyond a cursory view and appreciate these benefits, I thought I ought to stop reading.
However, I wanted to give Kay the benefit of the doubt – thinking that his argument would get better. Instead, it got worse. Kay took issue with Nick D'Aloisio, Summly's CEO, suggesting that he's not old enough to deserve $30 million from Yahoo. He proceeded to paint Summly as some obscure garage-start-up that somehow coerced Marisa Mayer into a bad deal.
Describing Summly, Kay said, "A company recently capitalized with $1.5 million in funding, with a million downloads, no revenue, licensed technology, and five programmers of questionable talent extracts $30 million from Yahoo. Good luck with getting a return on that investment, Yahoo, before it vaporizes in the spring air." In other words, Yahoo! got punked by a 17-year-old whiz kid.
Since when did age ever matter in business, especially in technology? I suppose Mark Zuckerburg should have given up on the idea of Facebook until someone in Kay's age bracket decided he was old enough to deserve a meeting with venture capitalist. It's idiotic!
Let's get some perspective
I'm not going to pretend that Yahoo! is a flawless company. But I also understand that the company had not shown real progress until Marisa Mayer arrived. For that matter, the stock is not sitting at a 52-week high because she's dumb. Under her brief tenure the company has already done things that Yahoo! has not done in four years, including growing net revenue, which arrived 5% higher year over year and 12% sequentially.
Granted, it has been a while since Yahoo! really made a splash on the market. However, changing a corporate culture and fundamentally repositioning of a company does not happen overnight. And I think Kay is still prejudging Yahoo!'s deal for Summly on the basis of the company's past, which is unfair. Or in this case, is just dumb.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.