110799

Billion-dollar acquisitions: are they worth it?

Google just bought Nest for $3.2 billion, let's take a look at how other giant purchases panned out

Financial trends and news by Steven Loeb
January 18, 2014 | Comments
Short URL: http://vator.tv/n/3471

As you may have heard, Google bought smart thermostat company Nest for a whopping $3.2 billion earlier this week. 

Yes, $3.2 billion. It's the most that Google has ever spent on an acquisition, outside of the $12.5 billion it spent on Motorola in 2011. 

In other words, this is a pretty significant risk that Google is taking. Nest is one of the more established companies in the Internet of Things space, and probably the best known, but nothing is absolutely certain. Google could wind up taking a multi-million bath if things don't pan out for whatever reason.

And so this has gotten me wondering: how often do these types of deals work, and how often they crash and burn?

Let's take a look at the evidence:

eBay/PayPal

Not every deal can be a winner, and they certainly can't all be as profitable as eBay's puchase of PayPal , which turned out to be one of the successful deals of all time.

Back in 2002, eBay purchased PayPal for the price of $1.5 billion. In the ensuing 11 or so years since that deal went through, PayPal’s revenue has grown every single year since it was purchased, as has its percentage of eBay's total revenue.

In fact, close to half of eBay's total revenue now comes from fees generated by PayPal. In the third quarter of last year, eBay reported $3.9 billion in revenue. $1.6 billion, or 41%, of that came from PayPal.

One thing is for certain: eBay has made its money back; PayPal actually made more for eBay than its acquisition price in just the last quarter alone. The deal has turned out so well that is has been listed as the number one smartest tech startup acquisition ever.

If only every acquisition could turn out like this!

Microsoft/Skype

Microsoft acquired Skype for a whoooole lot of money in May of 2011: $8.5 billion in cash. It beat out both Facebook and Google for the purchase, and permanently cancelled Skype's planned IPO.

So, was it worth it? Well, Skype now has 299 million connected users. In the full year of 2013, which ended in June of last year,  Skype users made more than 162 billion minutes of calls, but only paid calls which would generate revenue, and it is unknown how many of them there were. 

Microsoft makes it tough to say if the deal has worked out financially because, well, they basically aren't saying. Any money being made by Skype is now rolled into the Entertainment & Devices unit, which also contains revenue from Xbox and Windows Phone. No individual numbers haven't been broken out for the company.

Remember that it's not even been three years since the aquisition, so perhaps, with more time, it can turn into another PayPal situation.

No matter how you look at it, I would certainly not call the deal a bust. 

Facebook/Instagram

Here's another success story - Facebook's $1 billion purchase of Instagram in April of 2012. 

After launching in October 2010, Instagram became an instant hit, reaching one million users only two months later. After it launched its Android app in April 2012, the same month that Facebook announced that it was buying the company, Instagram saw its user numbers jump by 10 million in 10 days. It cracked the top 10 fastest growing sites in the United States for March, jumping 19% in a single month.

After being purchased, Instagram's unique visitors shot up 78% to 14.5 million in April, from 8.2 million unique visitors in March, making it the fastest-growing Web property at the time.

Despite the deal now being almost two years ago, the service is still growing quickly. Instagram hit 100 million users in February of last year, and then150 million in September. And it is now the number 11 free app on iOS and number 3 on Android.

Yahoo/GeoCities

Here is one that decidely did not work out: in January 1999, Yahoo spent $3.6 billion to buy up Web hosting service GeoCities.

Originally, the site was used by communities of people, who shared similar interests, and allows customers to create their own home page on the Internet. Each "city" was for a particular interest; for example, SiliconValley was for pages dedicated to computers, hardware, programming, and technology, while Broadway for theater and performing arts and WallStreet was for business and finance.

At the time of its acquisition, GeoCities was the third most visited site on the Web behind AOL and Yahoo, with 19 million unique visitors.

The deal, however, turned out to be a bust. Yahoo tried to imposed new copyright rules on members, which said that Yahoo would own all rights and content, including media such as pictures. The decision was reversed, but it still lead to overhwhelming anger in the GeoCities community.  

This, combined with Yahoo's decision to switch the format from neighborhoods to "vanity" URLs through members' sign-up names to Yahoo, doomed the company.

In 1999, 10 years after being acquired, GeoCities was shut down

Google's other billion dollar deals:

This is not the first time that Google has gone all the way up to 10 digits to purchase a startup.

  • DoubleClick

Google acquired display ad company DoubleClick for $3.1 billion in cash in April 2007, and held the record for Google’s largest acquisition until Nest. And right from the start it caused trouble for Google.

First, the deal raised antitrust and privacy red flags, and U.S. lawmakers investigated the implications of the acquisition to determine whether any infringement of antitrust laws was indeed taking place. 

Then, in June of last year, the Federal Trade Commission reportedly began looking into potentially opening an inquiry into whether or not Google was using its dominant position in the online display-advertising market to curb competition.

The issue at hand is in regards to whether or not Google has been using its own display ads to to push other companies, and websites, into using DoubleClick products, including Ad Exchange.

But financially it has worked out well; Google led all other major Internet properties with $2.26 billion in net US digital display ad revenues in 2012.

  • YouTube

Google bought YouTube for $1.7 billion in 2006 and... well, you know how this one turned out. 

Since then, no other user-generated online video sites that have come up in that time have been able to challenge it for supremacy. Even all these years later, YouTube remains the go-to place for people to put their videos if they want them to be seen.

Google is expected to have made $5.6 billion in revenue from the service in 2013. 

Conclusion

It seems like most of these deals tend to work out.

I can think of two reasons for that: either it is because companies must do extra diligence to make sure that they know what they are getting into, or they work extra hard once they do buy to justify the expense. Or, most likely, both. 

One thing that is for sure; no CEO worth their salt is going to make a multi-billion deal that they let die on the vine.

(Image source: http://nymag.com)


Related news


blog comments powered by Disqus