Yahoo says the private information of at least 500 million has been compromised due to a cyber-attack in 2014. In the biggest security breach to date, hackers gained access to sensitive information including names, emails addresses, telephone numbers, birth dates, passwords, and security questions.

The security breach has ramifications not just for Yahoo and its users, but also for Verizon, which is currently in the process of acquiring Yahoo for $4.8 billion. Even though the cyberattack occurred in 2014, Verizon only found out about it last week. As a result of the hack, Verizon could possibly walk away from the deal or renegotiate the price.

The hack on Yahoo highlights the need for functional due diligence in order to identify all critical information that could potentially impact a deal. Leaders tend to focus on financial and legal data during due diligence, however failing to fully research other areas of the business, including cybersecurity, can be detrimental to your acquisition. You don’t want to find a “surprise” after the acquisition closes.

Functional Leaders Critical to Comprehensive Due Diligence

Functional due diligence is one of the best ways to ensure you are making decisions with the most complete data. This means incorporating leaders from each of the functional areas of your business – IT, sales, marketing, operations, accounting, finance – early on in the due diligence process. These leaders are involved in the day-to-day tasks of running the company and have a high-level of familiarity with their functional area. They are specialized experts who can spot problems, identify solutions, and ask appropriate questions that other executives may overlook.

It’s best to have each functional leader develop their own list of questions based on their experience working in the functional area of your business and the overall acquisition strategy. Next, have the functional leaders from your company meet with their respective leaders on the seller’s side to gather the necessary information. Once each functional leader has met with their counterpart, you can compile the individual lists into one comprehensive data set that covers all aspects of your business in thorough detail.

An addition to identifying risks and critical pieces of information, functional leaders can help develop and implement your integration plan. They will be able to anticipate specific integration challenges you may have and help develop solutions to avoid these pitfalls. Involving functional leaders in due diligence increases your chances of a successful acquisition.

Photo credit: Hades2k via Flickr cc

Another blockbuster tech deal was announced yesterday. Verizon will acquire Yahoo’s core business for $4.83 billion to boost its digital advertising capabilities. The deal includes Yahoo’s search, mail content and ad-tech business, but does not include Yahoo’s shares in Alibaba and Yahoo Japan. The combined company will reach over one billion users. Verizon plans to merge Yahoo with AOL, which was acquired last year for $4.4 billion, to create a larger advertising subsidiary.

Verizon’s Strategic Rationale

Verizon is building is digital advertising capabilities to compete with the top two players, Google and Facebook. With the deal, Verizon will double its digital advertising business to become the third largest US internet advertiser with 4.5% of the market share.

Lowell McAdam, Verizon Chairman and CEO, said in a press release“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.” 

In building on its AOL deal, Verizon is doing what we call taking “frequent bites of the apple,” or using a series of deals to achieve its overall growth strategy. Using a multiple deals rather than a single transformational deal can have many benefits including focusing on a single reason for acquisition, adjusting to integration challenges more easily and minimizing the risk of acquisition failure. Fortunately, Verizon has already had some time to digest and integrate the AOL acquisition because integrating Yahoo’s massive workforce of 8,800 employees and 700 contractors will be no easy task.

Integrating Yahoo will be critical to growing Verizon’s digital ad business. In today’s marketplace, content is king and Verizon will need to produce and monetize exciting content in order to compete with Google and Facebook, who have users creating unique videos for free on YouTube and Facebook. Even with Yahoo, Verizon will still be far behind Google and Facebook who make up 36% and 17% of the market, respectively.

Photo credit: Mike Mozart via Flickr cc

The biggest tech M&A disasters were the Time Warner-AOL $350 billion merger and Google’s $12.3 billion acquisition of Motorola Mobility.  In my observations, the greatest hurdle facing tech mergers is integration. Even where the strategy of the acquisition is solid, if the integration of the two workforces and assets is not executed properly, it will fail.  Even CEO Marissa Mayer, who has made more than 30 acquisitions since joining Yahoo in 2012, may be struggling with integration. Just last week she fired Henrique De Castro, her COO and the person typically responsible for integration.

Lessons Learned From Integration Struggles

Warning signs of the Time-Warner AOL disaster began with the press release they put out after consummating the deal. It contained lots of flowery language, but left everyone scratching their heads as to why the two companies were merging. There was also a culture clash. Executives struggled with integrating an up-and-coming young tech company with an established media mogul. Eventually, in 2009, Time Warner had to dispose of AOL.

Google’s purchase of Motorola Mobility in 2011 also failed to meet expectations and Google announced on January 29, 2014 it would sell the acquisition to China’s Lenovo. This loss-making division was supposed to usher in an era of new devices built entirely by Google. Unfortunately, Moto X, Motorola’s smartphone, performed poorly in comparison to comparable devices. Google’s failure with Motorola was partly due to issues with integrating Motorola with Google’s existing hardware division and with the company as a whole.  Perhaps Lenovo will have more success.

Amazon M&A Proves Bigger Is Not Always Better

The moral we can draw from this is that bigger is not always better. Although big acquisitions are the most visible due to widespread media coverage, they often fail to be truly successful.

Amazon provides an instructive example. Between 1998 and 2001, Amazon approached acquisition the wrong way, buying or investing in 29 companies across various industries from toys to car dealerships to financial services. Most of these acquisitions failed and Amazon’s stock plummeted from its peak at $106.69 on December 10, 1999 to a low of $5.97 in on September 28, 2001.

However, since 2004, Amazon has refocused on making smaller, strategic acquisitions. This is what I call “taking frequent small bites of the apple.”

Its most recent acquisition of social media site Goodreads, valued at $150 – $200 million, was tiny compared to Time Warner-AOL or even Google-Motorola. However, with Goodreads Amazon can build on its personalized recommendations and gain access to book fans. Amazon acquired TouchCo in 2010 for touch screen technology now used in Kindle Fires.  Building on this capability, Amazon acquired Liquavista, a mobile display technology company, in 2013. Amazon’s stock price is now $403.01 (as of January 30, 2014).

Small, strategic acquisitions allow companies to “digest” and integrate the entity. In all acquisitions, the devil is in the details. Although your strategy may be solid, if you don’t make sure all the pieces fit together, your acquisition is bound to fail. At the end of the day, companies, even tech companies, are made up of people. It is the people, more than the systems or technologies,that present the biggest challenges of integration. To overcome these, you need a strong leader with the wisdom and experience to combine different cultures while overseeing the operations of a newly merged company.

What will 2014 look like for mergers and acquisitions? While no one knows what the future holds, I see these three trends continuing:

1. Increased middle-market M&A

Middle-market companies are the primary driver of economic activity in the U.S.  With favorable market conditions, expect an uptick next year. A survey by Mergers & Acquisitions  showed a positive outlook for 2014; 71% of respondents expect a better year for mid-market M&A than 2013. They identified healthcare, technology, energy, and manufacturing as the top sectors for growth.

Increased M&A activity, especially in the middle-market, is an indicator of an improving economy. Executives are more likely to make deals when they are confident in the economy and the markets.

2. Healthcare consolidation

The Affordable Care Act has massive implications for the healthcare industry, but no one can say for certain what those implications are. Amidst all the uncertainty, the healthcare industry is seeing a significant amount of reshuffling, led by two big hospital consolidations this summer. We’ve also seen the rise of new products and services like private health exchanges. Look for this trend to continue in 2014 resulting from healthcare regulations.

3. “Acqui-hiring”

“Acqui-hiring” refers to recruiting a team of employees by buying a company. This is often the easiest way to attract top talent. For example, under CEO Marissa Mayer’s leadership, Yahoo! has acquired 30 companies for their technology as well as for their talented engineers. With their latest acquisition of PeerCDN, Yahoo brought on three new engineers. Other recent acquired companies like EvntLive and Ptch will be shut down, with the employees joining Yahoo’s team.

Photo Credit: danielmoyle via Compfight cc

In 2013, we saw interesting mergers & acquisitions across multiple industries, ranging from hot tech deals like Yahoo’s $1.1 billion acquisition of Tumblr to the rescue of favorite food brand Twinkies from bankruptcy by Metropolous & Co. and Apollo Global Management.

While the potential synergies of the two companies are always laid out, not much is said about how to bring these two workforces together for successful integration. Check out three of my top tips for success on Money For Lunch. Click here to read the full article: “Merger Madness: Three Tips for Success.”

Photo Credit: Mike Licht, NotionsCapital.com via Compfight cc

Facebook’s $3 billion offer to buy Snapchat points to a growing number of mobile technology acquisitions.

Yesterday The Wall Street Journal reported Facebook offered $3 billion to acquire Snapchat. While Snapchat has declined, Facebook’s offer points to growing trend of technology companies acquiring rather than building new mobile apps.

Most recently, we’ve seen a string of acquisitions by Marissa Mayer, including Tumblr for $1.1 billion, in an effort to boost Yahoo!’s mobile presence. In June Google acquired traffic app Waze and April 2012 Facebook acquired photo-sharing app Instagram for $1 billion.

Acquisition is a powerful way for companies to get new technology quickly access new customers. Yahoo! acquired Tumblr in part for its 300 million unique visitors, many of who are teenagers. Facebook likely wanted to acquire Snapchat due to its growing popularity with teens. Teen users of Facebook have declined over the past year. By buying mobile apps, companies not only acquire new technology, they also broaden their customer base by acquiring new users.

 

Photo Credit: Barn Images

Yesterday, Blackberry announced it had signed an LOI with a group led by Fairfax Financial, an insurance investment company from Toronto, Canada. Under the terms of the LOI, BlackBerry shareholders would get $9 a share in cash, making the deal worth about $4.7 billion. On Friday, BlackBerry reported $950 million and $995 million in operation losses and announced plans to cut 4,500 jobs.

I have very low hopes for this being a successful transaction for BlackBerry – Fairfax Financial Holdings is an investor, not an operator.  Furthermore most of its investments are in the insurance market.  What FFH did by putting an offer on the table is “call the question” rather than let the fate of BlackBerry languish in the marketplace and media speculation. Brilliant move. The only synergy in this deal is they are both headquartered in Toronto, Canada.

What BlackBerry really needs is a strategic owner – such as a hardware company like Dell or a software company like Microsoft or Google who could benefit from a loyal fan base with an established device. Microsoft just purchased Nokia’s phone business in order to accelerate its growth in mobile devices. A similar partnership would benefit BlackBerry.

Perhaps BlackBerry could be acquired by an unlikely candidate such as Yahoo! who just spent the past year buying over a dozen mobile technology companies and could effectively deploy those engineers to really create a unique product offering.

*Full disclosure – I just switched to an iPhone this past Friday, after being a loyal BlackBerry user for many years.

Photo Credit: Marvin Kuo via Compfight cc

Yesterday Yahoo announced its plans to buy Tumblr for $1.1 billion in cash, which has really grabbed people’s attention. Marissa Mayer has made about 10 acquisitions since becoming CEO in July 2012, as part of her overall plan to make Yahoo part of our everyday routines.  This is her biggest investment yet.

Did Yahoo Overpay for Tumblr?

Some are already questioning if Yahoo overpaid for Tumblr, which until now has failed to generate any significant profits. On the upside, Tumblr brings with it 300 million unique visitors each month, but Yahoo still needs to make money on the deal. It’s certainly going to be tough to generate the level of return that’s required when you make an investment that’s all cash.

I would characterize the Tumblr deal this way. You’re talking about an acquisition with a mere $13 million in revenue, so Yahoo is paying 84 times revenue. Some have said Tumblr could make $100 million, but that would still mean Yahoo paid ten times revenue. The proof will be in the pudding — that’s to say, Yahoo’s ability to actually grow the revenues of the business. It’s far from clear how that will be done.

In the short term, one of the biggest benefits of this acquisition is a huge spread of people now talking about Yahoo, from businessmen to tech gurus to the teenage and twenty-something users of Tumblr.  Think about it, who was talking about Yahoo a year ago? Clearly this deal has caught people’s imagination.

Yahoo’s Promise

One of the things Yahoo should be careful about is the integration of Tumblr.  Yahoo’s image as an old internet company from the 1990s could have a negative impact on Tumblr users. Young users are a fickle group of folks that can and will move on to the next technology if they see Tumblr become irrelevant.

Yahoo’s press release on Tumblr “promises not to screw it up”.  But if Yahoo plans to “not screw it up,” what exactly are they planning to do with their acquisition? How will Yahoo balance the need to create value and growth in that business, and build some connectivity with Yahoo, while also continuing to attract new Tumblr users?

Fall-Out From the Tumblr Story

This deal is likely to put a lot of pressure on other companies. CEOs will be getting calls from the board asking “What’s our strategy? What are we going to do? How are we breaking into new technologies?” Another issue that I’ve written about before is the amount of excess cash currently sitting on the sidelines. $1.1 billion sounds like a lot of money, but it’s only one-fifth of the cash  on Yahoo’s balance sheet. There’s a lot of money and a lot of movement in the marketplace right now, so you’ll see growing pressure on CEOs to make acquisitions.

If you’re thinking about acquisition, I recommend you remain strategic, and don’t take a completely reactionary approach. Even if “everyone else” is buying companies, your acquisition will only be successful with a strategic plan. As for Yahoo’s acquisition of Tumblr, only time will tell if the risk will pay off.

*For more on my thoughts on Yahoo and Tumblr, check  out my interview on Fox Business News.

 

Photo Credit: Giorgio Montersino via Compfight cc