The StumbleUpon Effect: Which Internet Acquisition Will Blow Up Next?

We ran an interview last week with Jeff Lindsay, the Bernstein analyst who believes strongly that internet companies too often buy the wrong startups, and later pay the price. Yesterday’s news that eBay (NSDQ: EBAY) sold StumbleUpon back to its original founders seemed to be evidence of what he’s talking about: From the beginning, StumbleUpon was a poor fit with eBay’s core business. Which internet acquisition will go south next? Below are three good candidates. In picking the most ill-considered acquisitions, we were looking for deals where the acquiring company paid too much (based on the acquired company’s potential returns) and the two companies are proving to be a poor match.

AOL/Bebo: Putting aside its dial-up business, AOL (NYSE: TWX) appears to be doing some things right. It has successfully launched niche/targeted sites to entice advertisers and grown traffic at those sites consistently (its MediaGlow sites grew 47 percent in January ’09, according to comScore). That’s what makes its $850 million acquisition of Bebo a year ago so puzzling. What does AOL get for the high price tag? A social network just at the time that advertisers are shunning social networks in favor of search and — you guessed it — more-targeted niche sites. And only 20 percent of Bebo’s traffic comes from the States; U.S. traffic is more valuable to many advertisers than overseas traffic.

eBay/Bill Me Later: When eBay paid $945 million for Bill Me Later in October, many questioned the timing: the service allows consumers to make online transactions that they can pay for at a later date; when the deal closed, the consumer-credit market was in a freefall. Rising delinquencies are likely to come back and haunt eBay on its Bill Me Later purchase. Now analysts are also concerned about eBay’s problems integrating the acquired company. That struggle will likely hurt eBay’s profit margins.

Best Buy/Napster:This wasn’t a large acquisition for Best Buy — just $121 million ($54 million net of cash) — but it did leave many people scratching their heads. The subscription-music business is very competitive, with Rhapsody, eMusic, Microsoft (NSDQ: MSFT) Zune, and a variety of mobile players all trying to make their mark. In addition, online subscription music is outside Best Buy’s core brick-and-mortar business. Finally, the labels got rid of digital-rights-management restrictions following the purchase, so people can now buy music in MP3 format anywhere and play it on any device.That makes the subscription proposition pitched to consumers an even more difficult sell.