Consumer Confidential

Consumer Confidential by David Lazarus: Yahoo's billion-dollar bet on synergy may not be worth it

Consumer columnist and contributor to American Public Media's Marketplace radio programJune 4, 2013 

When Google went public in 2004 for $85 a share, I wrote a column questioning such a high valuation for a company built on a math equation. Wasn't it inevitable that someone would create a better search algorithm?

Google has been selling lately for around $870 a share and peaked above $915 in mid-May. So take what I'm about to say with a pinch of cyber-salt.

Yahoo is paying $1.1 billion for the blogging service Tumblr, which enjoys a loyal following among millions of young, cool, edgy and influential users, but little, if any, profit. Let me reiterate: $1.1 billion for a privately held company that barely pulls down pocket change, if that.

Moreover, Tumblr's young, cool, edgy and influential users are so fickle that Yahoo's chief executive, Marissa Mayer, had to declare that Yahoo wouldn't screw up the site by making Tumblr more like, you know, Yahoo.

At the risk of sounding like an old fogey, what kind of business deal is this when more than a billion bucks is being spent on a financially dubious tech outfit, and the new owner has to swear it won't muck things up by actually owning it?

"That's a fair question," said John Blackledge, a financial analyst at the investment firm Cowen & Co. "But the purchase seems reasonable given the potential synergy."

I spoke with a handful of Wall Street types after the Yahoo-Tumblr deal was announced, and nearly every one of them used the word "synergy."

It's a word that's tossed around any time some megadeal gets announced. When AOL said it was buying Time Warner for $160 billion in 2000, it was all about the synergy of the two media heavyweights.

That deal is now viewed as one of the dumbest mergers in U.S. corporate history.

EBay's 2005 purchase of Skype for $2.6 billion was also said to be a model of synergy. EBay was so synergized that it sold off Skype at a huge loss four years later.

And that brings up another point: Can you buy your way to cool?

After eBay dumped Skype, the online calling service was snapped up in 2011 by Microsoft for a hefty $8.5 billion. Synergy was the watchword.

Skype certainly isn't hurting. Microsoft estimates that a third of the world's voice calls now occur on Skype. But in an increasingly text-driven world, is that like cornering the market on a commodity that fewer and fewer people want?

And is Microsoft any cooler for having Skype in its fold? You could argue that anything a techno-dinosaur like Microsoft touches becomes, by definition, instantly uncool.

Yahoo has the same image problem. Yet all the analysts I spoke with said one of the reasons Yahoo would pay such a high price for Tumblr is a desire to bask in the blogging site's reflected cool.

"Yahoo has been needing to attract a younger demographic, which is how you attract advertisers," said Ron Josey, managing director of JMP Securities. "Maybe Tumblr is the spark to do that."

Maybe. Or maybe not.

Here's the thing: For synergy to work, you have to combine two things into a more effective whole. Yet Yahoo has gone out of its way to say it won't do anything to tick off Tumblr users.

By that, I assume it means that it won't try to rebrand Tumblr as a Yahoo property or actively seek to steer Tumblr users toward Yahoo. If so, what's the point?

Google bought YouTube in 2006 for $1.65 billion. The deal, needless to say, was dripping with synergy.

Yet even though YouTube remains largely an independent brand, all data generated by the site - particularly video searches - contribute massively to Google's dossiers of what pretty much every Internet user is interested in.

YouTube also positions Google as the main gatekeeper to the Net's video content, which is an enviable position to hold.

What will Yahoo get from Tumblr? Apparently it won't be millions of new users for its search engine, email or other services. Nor will it be the chance to blanket the well-trafficked site with ads.

I've always been wary of this notion of buying your way to success. The best businesses don't seem to follow that recipe. They do it old school. They come up with an exciting product and then win customers through superior service.

They also adhere to the funny idea that profit matters and that the possibility of stratospheric growth isn't the same as actual growth.

Or maybe I'm just being an old fogey again.

david.lazarus@latimes.com

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