The AOL-Bebo story and why acquisitions destroy value

AOL’s recent sale of Bebo was all over the news last week for all the wrong reasons. AOL has had an unenviable track record of killing acquisition value for quite some time. Bebo, bought for $850M a couple of years back, was sold last week for under $10M to Criterion Capital Partners. AOL may go around justifying this deal giving it a “meaningful tax deduction” but the ridiculousness of the value lost cannot be ignored.

For some reason, media companies have never done a great job of managing internet acquisitions in general and social networking sites in particular. Murdoch’s NewsCorp paid $580M for MySpace and ended up paying another $450M last year as impairment charges! Along similar lines, ITV (a British TV group) did an AOL when it sold off Friends Reunited for 25M pounds after acquiring it for 7 times that price.

Acquisitions regularly destroy value across industries but one of the main reasons the success rate is that much lower with media companies acquiring internet companies is the inherent culture clash. Most internet startups, if bought early enough, are a group of T-shirt-and-shorts-sporting geeks-in-a-garage who iterate quickly, learn quickly and build quickly. Most media houses, on the other hand, are slow-moving, largely-family-owned with large stakes owned by which refuse to move without the customary bureaucracy and paperwork. The culture shock is immense, the bottleneck theory kicks in and the combined entity is only as fast as its slowest entity.

One of the main reasons acquisitions in the social networking space, in particular, have killed value has been the lack of post-acquisition integration strategy. Social networking took the world by storm a few years back and every media and internet giant wanted to have it in their portfolio. No one was quite sure why! Some wanted to have a “social networking strategy”, others wanted to have a “Gen Y strategy” but no one was quite sure how they were going to integrate a social networking site with the rest of their products. A case in point is ebay’s acquisition of Skype. While Skype may not fall under the social networking umbrella, ebay ‘s acquisition of Skype wanted to fundamentally do what most social networks do… help its users connect and share information better, and of course, given Skype’s capabilities, add the voice channel. Though not an AOL-Bebo story in pure numerical terms, Skype left the ebay canvas without registering much change for ebay largely because ebay had no clue how to go about integrating its multiple online shopping platforms (many of them country-specific) with Skype.

As for AOL, it remains to be seen how many value-destroyed acquisitions they have to spin off before they return to being a growth story!

Sangeet Paul Choudary is a leader in the New Ventures group at Intuit Asia-Pac and and loves chicken soup (for the stomach), post-modern satire (for the soul), an over-emphasis on business model and an under-emphasis on powerpoint. This post was first published at Venturati

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