By Wendy Lee
San Francisco Chronicle.
When Marissa Mayer took over as CEO of Yahoo, she went on an acquisition spree, spending more than $2.3 billion for some 50 startups meant to infuse her struggling company with promising technology and fresh talent.
It was a bold leap, one that was applauded by some in Silicon Valley. But three years later, analysts are skeptical about where Yahoo has landed. The Sunnyvale tech giant hasn’t made a compelling case for why the acquisitions will entice advertisers to invest more marketing dollars in Yahoo. And recently, the company’s troubles have deepened. Its stock price has declined from a year ago, there’s been an exodus of senior executives and its U.S. digital ad revenues haven’t budged since 2012.
“The core business results have been awful,” said Shyam Patil, a senior Internet analyst with Susquehanna Financial Group. “If these acquisitions were supposed to turn around the core business, they haven’t worked yet.”
By acquiring all those companies, Yahoo also acquired roughly 100 company founders and CEOs as employees — potential visionaries whose technology and ideas could infuse the company with new energy. Chronicle research shows that at least 27 of them have already left. And while the acquisitions haven’t produced big financial gains in the short term, Yahoo’s management team believes its business strategy is a long-term one. In other words, as the clock ticks on Yahoo’s turnaround, the startups and their leaders might still give the company a fighting chance.
A ‘deserted island’
When Mayer joined Yahoo, morale was low and recruiting talented engineers was tough. Yahoo was far from their first choice.
“Yahoo basically became a deserted island and there was no way to get talent into that company in a regular way,” said Venky Ganesan, a managing director with Menlo Ventures. His venture firm invested in Flurry, which was acquired by Yahoo last year. “Nobody wants to show up in the place that has nobody there.”
So Yahoo embarked on a mission to hire people through acquisitions, which Mayer said was necessary to grow a staff large enough to push the company forward in mobile, video, social and native advertising. These categories, relatively non-existent prior to Mayer’s mobile efforts, have now grown to $422 million in the third quarter, roughly one third of Yahoo’s overall revenue.
For example, engineers at app developer Hitpost Inc. probably wouldn’t have worked for Yahoo if it weren’t for the acquisition in 2013, said Courtland Alves, who led the startup through the sale and worked for Yahoo as a product and engineering manager until he was laid off in March.
“If you’re a talented engineer you have your choice of a job and generally you are going to go to a company with a lot of excitement … whether correctly or incorrectly, I don’t think Yahoo has that sort of reputation,” Alves said. He estimates seven Hitpost workers joined Yahoo after the acquisition and now, only two remain there.
Yahoo’s acquisition of Hitpost was a win for Alves’ company, he said, because the product “didn’t have the traction that we were looking for.”
CEOs stay on
To be sure, the majority of founders and CEOs brought in through acquisitions have stayed at Yahoo. But some analysts believe acquiring employees by buying companies isn’t the best strategy, since those people bail after short-term attempts to retain them run out. After an acquisition, a company like Yahoo might offer bonuses or vested stock in exchange for years of commitment with the company, analysts said.
“The end result is typically acquisitions are done to gain technology and products. They should never be done to just get people,” said Rob Enderle, with advisory services firm Enderle Group. “The ability to retain them is pretty poor.”
Some of Yahoo’s acquisitions have brought new or revamped products into the company, such as Yahoo News Digest, which summarizes news, the Aviate app to organizes a smartphone’s home screen and the Livetext app — texting and video with no sound.
Entrepreneur Jerry Shen, the founder and only employee at Bignoggins Productions, was acquired for an undisclosed sum in 2013.
Some analysts say the deal could be worth tens of millions of dollars. In his two years at Yahoo, he used his company’s technology to revamp Yahoo’s fantasy football app to good reviews. He and coworker Ron Belmarch also convinced Yahoo to join a new, growing product category –daily fantasy sports.
“When I first got to Yahoo, I was shocked at how poorly they understood mobile,” said Shen, who was a director of engineering overseeing Yahoo Fantasy and Daily Fantasy. “Without doing it, Yahoo would have been completely left behind in mobile.”
Though he said he enjoyed his time at Yahoo, he was abruptly let go in August, according to the Globe and Mail, for writing an insensitive all-company email that referenced racial slurs. Shen said he plans to build another start-up and will travel cross-country in an RV.
Jon Paris, who founded task organizing app Astrid and now works at Yahoo, said the only member of his 8-person team to leave went to Harvard Business School.
The benefits of working at Yahoo, he said, include resources such as access to Ph.D. experts specialized in an area of research and the ability to solely focus on building products.
“As long as I’m able to continue to build products that I believe in and I’m continuing to get the resources to have impact, I’m happy to be here,” Paris said, adding he is working on products that haven’t yet launched.
Yahoo’s biggest acquisition during the company’s three-year shopping spree was blogging site Tumblr for $1.1 billion. Yahoo executives and investors alike believed Tumblr — which accounted for nearly half of Mayer’s acquisition tab — could boost ad revenue and make Yahoo more relevant to younger audiences.
But some analysts question the 2013 purchase.
“I don’t know if that deal paid off,” said Martin Pyykkonen, a senior Internet analyst at Rosenblatt Securities.
Tumblr’s well-known founder David Karp remains at the company but was not available for an interview. In April, Mayer said the company is optimistic Tumblr will reach its goal of $100 million in revenue this year. Traffic on Tumblr from June 2013 — the month the deal closed — to September 2015 has increased 56 percent, according to analytics firm comScore.
“We continue to work hard at Tumblr monetization in a thoughtful, sustainable manner,” Mayer said in a second quarter earnings call transcript. “The opportunity here given Tumblr’s massive engagement is substantial.”
Under Mayer’s leadership, Yahoo has made significant inroads generating additional revenue outside of traditional banner ads.
The company acquired mobile analytics firm Flurry, which has now more than 700,000 apps using Flurry’s software development kit and it purchased video ad platform Brightroll, that already had more than $100 million in revenue last year. In February, Yahoo hosted its first ever mobile developer conference.
But not all the entrepreneurs wanted to stay at a company forced to deal with older, outdated products that represent a big chunk of its revenue.
Amit Kumar’s business, Lexity, which provided tools to small businesses, was acquired by Yahoo in 2013. The entrepreneur was placed in charge of Yahoo’s small business division and became frustrated when the company wanted him to focus on maintaining traditional e-commerce businesses like providing domain names.
“A turnaround is less fun than going on a growth path, which is what I wanted to do,” said Kumar, who left Yahoo last year and is now running a mobile start-up, Trimian. Several of his Lexity teammates who joined Yahoo after the acquisition are now with him at Trimian, Kumar said.
Meanwhile, Mayer says she is committed to bringing Yahoo back to greatness.Mayer said on Tuesday at the Fortune Global Forum that when she joined Yahoo, almost all revenue streams were in decline and she was the 7th CEO of the company in 61 months.
She believed a way to grow revenues was to invest in mobile. “We have built a future,” Mayer said.
While some of her new startups have yet to become the next big thing, they have at least added interesting products and energy to the business.
“You don’t know how much worse things would have been if they haven’t done these deals,” Patil said.