Analyst Interview: Why Good Internet Companies Make Bad Acquisition Decisions

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Bernstein research analyst Jeffrey Lindsay published a report last week that caused some eyebrows to raise. Using the rumors about a possible Google (NSDQ: GOOG) acquisition of Twitter, it made the argument that all too often publicly traded internet companies buy startups that don’t have business models — and probably never will — because the companies doing the buying think they can add those business models post-acquisition. The report was surprisingly stark in its assessment of the culture among VCs and Silicon Valley companies, contending that 35- to 40-year-old executives at the large companies are often wooed into making bad acquisitions by the VCs who convince them they are about to miss out on the next big thing. We called Lindsay yesterday to follow up on some of his points. Below are excerpts from the interview.

What was the reaction to the report from your audience?

My clients are institutional shareholders in these companies. Based on their comments, it seems they are becoming increasingly concerned about the potential for value destruction that occurs when internet players make poor acquisitions of startups that cannot make money. Google is actually a good example of a company that often gets a free pass on potentially value-destructive acquisitions because they continue to grow pretty rapidly. If the analysts don

4 Comments

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It's the pressure to grow revenue… CEOs think they can just buy companies and tack that revenue on to the bottom like to show growth to investors and they just end up messing it up.

Mani

One reason why acquisitions fail is the lack of focus to generate revenue after the acquisition. Before acquisition, there's a pressure to generate revenue & so the motivation level to focus on revenue generation is very high.

Google is what it is today because it stayed independent. If Google was acquired by Yahoo or AOL in 2000, then Yahoo / AOL would not have found a business model like this.

Same can be true for Twitter also now. Twitter's team will experiment many ideas before identifying one good business model. But if they get acquired, the motivation to generate revenue will be lower.

jerky

AOL's acquistions of ad.com and Quigo are in the same class.

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