Over the past few years, Yahoo has been on an acquisition spree in an attempt to boost share value after losing its edge on organic growth. Although the tech giant’s CEO, Marissa Mayer, has recently been on a hiatus since December on maintaining this trend, it seems like the firm is ready to return to its norm with its acquisition of Polyvore, a clothing e-commerce company, in August for $200 million.
While it is quite natural for a company to make a few acquisitions every so often for strategic reasons, firms should, in general, not make acquisitions in an attempt to inorganically grow its share value. Yahoo has been long criticized by the investor community for spending large amount of money to acquire often losing start-ups. For instance, its acquisition of Tumblr in 2013 for $1.1 billion was never able to generate substantial cash flow and justify its price (analysts predict that the social media platform only generates $10-15 million revenue annually). This time, Yahoo’s buying rational is the hope that the 350 retailers associated with Polyvore will natively advertise on its network, which will boost bottom line ad revenue. Ultimately, management hopes that a series of acquisition related synergies will help drive up the firm’s share price, which has dropped more than 20% since last year.
Personally, I feel the acquisition spree is grossly unnecessary. As soon as a firm is unable to deliver organic growth and innovation, the firm should either aim to restructure its business to restore its competitive edge (think IBM) or return its earnings to its shareholders. Instead of doing either, Mayer is only miring Yahoo in a sea of likely failed acquisitions that not only draining Yahoo’s cash reserve and depreciating the firm’s equity value, but also further quickening its declining phase.
- Yue Song