The Yahoo Deal!!

The Yahoooo Deal!!
The Tech M&A market has been quite a force in the last couple of years....A number of strategic acquisitions, few bad ones, and some raw deals. The cracking news for the last two weeks has been Yahoo's acquisition of Tubmlr.

As I read through the news articles, annual reports, and blogs on the web - there's clearly one word that stands to justify the deal "SYNERGY". The term synergy can be ambiguous to many of us. In this blog post, we will discuss about Synergy and potential gains for Yahoo with respect to Tubmlr deal.

Synergy:
Synergy is the potential value that can be generated from an M&A deal. As one can understand, there should be some value created by the merged/acquired firms. If there is no value creation(i.e. Synergy), there is no point in going through the expensive M&A process.

A M&A synergy can be attributed to following important factors: Revenue, Cost effectiveness, Financial. Revenue refers to increasing market share, sales etc. Cost Effectiveness refers to improving operational efficiency and achieving economies of scale. Financial synergy refers to improved operating and financial leverage and other tax benefits. In a simple equation form, Synergy can be expressed as:

VAT = VA+VT+S-C
Where VAT  is the value of the firm after acquisition, VA  is Value of acquiring firm before acquisition, S is the so-called Synergy, and C is the cost of acquisition. As we can see from the above equation and  through common-sense, Synergy should be higher than the cost of acquisition in order to increase the value of the firm. However, this is hardly the case in most acquisition as research shows that Acquiring firms typically overpay for the target.

(Note:From an investor perspective, underlying economics of the deal does not rely solely on synergy. What really matters to an investor is - What share do I have from the Synergy? Is the acquiring shareholder makes more money or the target shareholder? By Default - Target shareholder makes more money in most cases. Since this blog post is dedicated to SYNERGY, we will not discuss anymore from Investor perspective. This digression was purposely introduced to tickle the reader's thought.)

The Deal:
There is possible synergy from an operational standpoint as both Yahoo and Tumblr can use the same infrastructure/platform in the future. However, this synergy is very small when compared to the huge price that Yahoo has paid for Tumblr. Further, There is no financial synergy of any sort with Tumblr deal as the capital structure of the two firms are very different (i.e Tax, WACC etc). Given that the deal is all cash-deal, Yahoo's liquidity position may take a beat. 

The potential synergy for Yahoo-Tumblr deal does not come from current revenue streams either. Tumblr's user base is quite strong with 150 million users, but the revenue has been sub par. Yahoo's revenue of close to 5 Billion dollars comes mainly from Ad-Display and Search.

In my opinion, the synergy could only be attributed to future revenue based on ad-display in Tumblr. Yahoo can build algorithms to target users and display targeted ads. It can also have a tie-up with Google,display google ads in Tumblr and get commission(Target Acquisition Revenue).

The Opinion:
In general, it does not look that bad-a-deal. There is a lot of potential for revenue growth and for increasing the market share. However, the deal seems to be a little pricey! If Yahoo had bought using operating income, its worth a salute. The funding has come from investments in Alibaba group which is basically a return to shareholder investment in Alibaba.

Secondly, if the deal had been really solid and if the future prospects were great, Yahoo could have opted for a combination of share/cash-based purchase. It appears to me Yahoo has bought a BMW - I would love the company to make the best out of it. The only problem is that BMW was "sold" rather than "bought" - its too pricey!

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