Yahoo Buys Tumblr, Essay Example

Introduction

The below situational analysis of Yahoo’s acquisition of Tumblr will analyze the important aspects of strategic decision-making and the results regarding the overall competitiveness of the firm. The authors of the current study will assume that the reason why Yahoo was unable to successfully monetize Tumblr was that they did not manage to create an acquisition model that re-creates the strategy to strengthen both brands. According to Jensen and Ruback (1998), several mergers and acquisitions fail because the leadership is unable to create value for the customers that would drive the business towards future growth. The above statement will be analyzed based on the facts of the Yahoo-Tumblr acquisition.

Situational Analysis

The investor relations document issued related to the acquisition (Yahoo Inc.) states that the two brands were going to be developed separately. The authors of the document successfully identified the opportunities that lay in Tumblr as a popular website. The business document also predicted that the audience of Yahoo would grow as a result of acquiring Tumblr. The authors were also optimistic related to the traffic growth of Yahoo through the acquisition, stating that a 20 percent increase was going to happen. The main idea behind the acquisition, according to Yahoo CEO Marissa Mayer was that the two companies were unrelated, but can be viewed as complimentary. It is, however, evident that the company was planning to achieve these goals without a well developed plan to modify and adjust the company’s corporate level and business level strategy in order to maximize the value provided for users of both Yahoo and Tumblr. As David Karp, Tumblr CEO stated: “Our team isn’t changing. Our roadmap isn’t changing. And our mission — to empower creators to make their best work and get it in front of the audience they deserve — certainly isn’t changing” (Yahoo, 1). According to Evans (3), top managers do often overestimate the ability of the leadership and strategy to create value through acquisition. The optimistic statements detailed above, not backed up by research and industry analysis suggest that Yahoo did indeed suffer from this disadvantage, due to the lack of careful analysis of Tumblr’s competitive environment, strengths, financial situation and growth potential. It is, though, evident that the motivation of Yahoo’s leadership to acquire Tumblr was to diversify the operations of the company.

According to Evans (7), the main reasons for failed acquisition are: poor strategic fit, cultural and social differences, incomplete and inadequate due diligence related to the process of acquisition, poorly managed integration, paying too much for the target company, and overly optimistic expectations of the acquirer related to market share growth and profitability.

Annaamalai states that the motivations behind Yahoo’s strategic decision were well thought through. The company has not had much success among the population that Tumblr was targeting: those technology-conscious 18-25 year old-s who like sharing their opinion and like making an impact. Tumblr, however, had a great disadvantage. Despite having a huge customer and subscriber base, it failed to generate sufficient revenue. Even though it was a recipient of a huge proportion of online traffic, it continuously failed to monetize it.

According to a recent publication in The New York Times (Wortham), there were cultural differences between the leadership of the two companies from the beginning. The problemthe author defines is that Yahoo did not have a strategic plan that would match the views and culture of Tumblr to monetize the more than 180 million blogs. Indeed, the leadership of Tumblr did not confirm that the company would make more money than prior to the acquisition.

There is no sign that pre-acquisition screening took place within the strategic management team of Yahoo to successfully analyze the financial, product, market position, resources, competitive environment, and management capabilities, corporate culture of the company. According to the  Course Material Number 2 (3), the market factors need to be considered before making a strategic decision to acquire a company, in particular focus on degrees of uncertainty. It has already been mentioned that Yahoo did not have experience with monetizing its operations among the target demographics of Tumblr. There was a degree of uncertainty: how would the users of Tumblr react to Yahoo’s strategic approach to monetize the site? Would the new approaches be welcomed and can the operation be made profitable? Is this segment of internet users profitable at all?

Analysis of Strategic Decision

The strategic decision of Yahoo was, as previously addressed, based on the potential benefits and not real strategic analysis. Yahoo did not only fail to analyze the market and the position of the company, its profitability, but also left out one very important step of the preparation, detailed in Course Material 2. By stating that the two companies would be independent and the operation would not be affected, the company offered freedom for Tumblr, without planning on monetizing collaboration capabilities. Indeed, making sure that both firms benefit from the knowledge and experience of the other company’s leadership, as well as technologies was omitted, and this is the reason why Yahoo failed to monetize Tumblr up to now.

Using the analysis design of Resource 2 (6-7), the strategic decision of Yahoo to acquire Tumblr should have been based on a careful analysis of the market conditions. The extent of redundant resources was low: this means that Yahoo had to increase the workforce, instead of reducing labor costs. This, on top of the initial investment into Tumblr has created a financial burden and restricted the amount available to be spent on harmonizing operations, developing a strategic monetization plan and sharing resources, knowledge, and technologies (Annaamalai, 2). Further, the same article (Annaamalai, 2) states that Yahoo made a mistake by trying to instantly monetize Tumblr as a website. They did not build upon the knowledge base of Tumblr related to users of free blogging sites. If they shared resources in the beginning, they would have identified an important constraint, described by Annaamalai (3) as follows: “pesky advertisements would repel new users from joining. In fact, some bloggers have firmly stated that they would switch blog hosting sites if Yahoo interfered. Because there is such a low barrier to entry in the blogging industry, users would simply move to other websites who don’t have advertisements and Tumblr would have no competitive advantage in the space”. The author brings up a relevant industry example: Google’s monetization strategy of YouTube: Google, in this case, took a careful approach, monitored usage, started to understand advertisers, and had an existing knowledge of online advertising through videos. Further, the company created a competitive advantage, building upon the popularity of video sharing sites, and offered an incentive for video content owners to create a revenue. Yahoo, while it did not try and flood Tumblr blogs with online advertisements and banners, according to Wortham, started to encourage advertisers to create their blogs on the site and create awareness of their brand: something that does not generate revenue. It is, indeed, a risky and untried strategy that would not result in a growth of revenue. Businesses would like to see results of their advertisement immediately, and are willing to pay for the results, while Yahoo seems to fail to offer them an opportunity to do so. Business owners are not likely to create blog posts if they can engage in targeted pay-per-click. They might move on to Google; Yahoo’s main competitors, causing a decline of market share and revenue.

This brings up another aspect of mergers and acquisitions mentioned in Course Material 2: the analysis of the degree of market uncertainty. In the case of high market uncertainty (there is no proof that the monetization strategy of Yahoo would work on Tumblr), instead of acquisitions, requiring a high level of investment, equity alliance should have been chosen as a strategy. Even though the level of competition in the blogging marketplace and online advertising was high, the lack of barriers to enter the market indicated that one bad strategic decision would reduce the market share of the company.

Finally, it is important to mention the lack of internal development strategy, described in Course Material 1. Sharing resources and knowledge has already been determined as a key success factor of acquisitions. Collaboration, while making sure that both companies preserve their unique brand features and strengths is important to create value. Acquiring skills and competencies through training and recruiting experts in the blogging field would have cost Yahoo a significant amount. However, the resources and knowledge base was already present in-house after the acquisition, still, the company failed to implement the knowledge base of Tumblr into making strategic decisions. Yahoo had a chance to immediately increase its core competencies and create a strategy, based on these competencies to monetize the site. Still, it seems like the management decided to “go their own way” and so far hasn’t been able to show significant results. Implementing the knowledge and competencies of Tumblr into the business level strategy would have resulted in a more thought-through, profitable outcome for Yahoo.

Conclusion

The above review of Yahoo’s acquisition of Tumblr has revealed some serious strategic decision-making mistakes. As described in Course Material 1 (43), the company should have focused on three strengths: competitive advantage, coordination, and control. The main mistake the top management of Yahoo made is that they overestimated the ability of the merged firm to create value for the customers, while it failed to successfully integrate resources and activities. Finally, the company failed to create a detailed market and risk analysis and a strategic business-level monetization strategy building upon the knowledge base acquired through the aquisition of Tumblr.

Works Cited

Annaamalai, K. “Yahoo-Tumblr Deal Will Be Written Off as Goodwill Impairment Charge In Future 10Ks”. Bulls & Pears Press. 2013. Web.

Evans, M. “Course 7: Mergers & Acquisitions (Part 1). Excellence in Financial Management. 2000. Web.

“Corporate-Level Strategy: Creating Value through Diversification” Chapter Six. Course Material Number 1

“When to Ally and When to Acquire” Course Material Number 2.

Wortham, J. “No Regrets for the Founder of Tumblr After Yahoo Sale” The New York Times. 2014. Web.

Yahoo! “Yahoo! to Acquire Tumblr. Promises not to screw it up” 2013. Web.