Yahoo!: Big Deals, Big Steals

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Let’s be frank for a moment: recently, Yahoo! (NASDAQ: YHOO) has been the ugly duckling of the Internet. From search engines to social media, it can’t seem to find a way to be cool. Faced with this harsh reality, Yahoo! is attempting to change.

Yahoo!’s desire to change has resulted in a complete overhaul of the company, including major changes in personnel. CEO Marissa Mayer’s attempts to reform the company have been bold, and have often been met with reproach by many critics. In February, for example, she placed a companywide ban on telecommuting, and since then has closed a few of the company’s lesser-known services.

Despite a negative reception from pundits, shareholder confidence has never been higher. Approaching $27, the stock has risen nearly 70% since Mayer’s appointment. Alongside her vision to re-focus the company, Mayer hopes to bring the company back to relevancy in both the mobile and search markets. With no groundbreaking services or technology, Yahoo! is forced to look elsewhere for innovation. Naturally, Mrs. Mayer has lead the company on a spending spree.

Shop ‘til you drop

If the saying “You’ve got to spend money to make money” holds true, Yahoo! is set to post record earnings. It has purchased 10 start-ups this year, six of them in May. For comparison, Yahoo! only made two acquisitions during all of 2012.

Recently Yahoo! inked its ninth deal of the year, agreeing to pay $1.1 billion to acquire the blogging network Tumblr. The acquisition will give the company access to the blogging service’s 100 million users, most of whom are young adults, a demographic Yahoo! desperately needs to attract. While Tumblr has yet to show revenue viability, big-name purchases have proven fruitful for other tech companies.

Lucrative bets

Believe it or not, there was a time when “googling” wasn’t a verb, self-driving cars were something you read about in Scholastic magazine, and Google Fiber could have been a dietary supplement. Much of Google’s (NASDAQ: GOOG) development can be attributed to key purchases that spurred its growth. In 2006, the company paid $1.65 billion to acquire YouTube. Google opted to let YouTube keep its own brand name, and as a result YouTube has grown to become the world’s largest video sharing site and second-largest search engine. One big name, one costly price tag. But undoubtedly one fantastic outcome.

It’s also worth mentioning that big-ticket advertisers on YouTube need a big purse. The going rate right now for a day on YouTube’s homepage? $400,000.

Facebook (NASDAQ: FB) is no stranger to start-ups either: only a few years ago it was a start-up itself. To spur growth among its user base, Facebook purchased San Francisco-based Instagram for $1 billion dollars. Wisely retaining Instagram’s name, Facebook has very successfully integrated the service into its own website. The number of Instagram users has grown to nearly 90 million. Posting nearly 60 pictures per second, these users comprise some of Facebook’s most engaged consumers. A good acquisition for Facebook? More like a great one.

In a recent landmark deal, Microsoft (NASDAQ: MSFT) purchased Skype for $8.5 billion dollars. Since its acquisition, Microsoft has not made drastic changes to Skype and Skype’s user base continues to grow. Critics argued that this mammoth price tag was far too high; I disagree. Microsoft may now leverage Skype’s extensive peer-to-peer network and integrate it into its own mobile and Xbox platforms. Additionally, it may generate revenue with “Conversation Ads” between Skype’s 250 million users. Such monetization should allow Microsoft to recoup any premium paid with relative ease.

Unlike your old modem, you probably haven’t heard much noise from AOL (NYSE: AOL) since its merger with Time Warner back in 2000. AOL has once again become an independent company after being spun off in 2009. With decreasing revenues and a brand name most believe to be dead, the company's future appeared bleak. In an attempt to right its sinking ship, AOL purchased The Huffington Post for $315 million dollars. While the company spent nearly half of its available cash to purchase the media juggernaut, it looks like this deal was a long-term bargain for AOL. AOL wisely kept the Huffington Post brand name and has slowly expanded its services. With hundreds of new properties to advertise on, the Huffington Post has resurrected AOL from near extinction.

YHOO Total Return Price data by YCharts

The Trend is your friend

The pattern is clear, and the message to Yahoo! is simple: let Tumblr grow on its own. Help it, guide it, and very slowly integrate it. Tumblr has done something right, so don’t tamper with its formula for success. Tumblr may be one of Yahoo!’s last chances for a “web redemption.” Paying a premium for this company was a risk, but if the company can successfully attract Tumblr’s younger users then this deal could be a steal. If Yahoo! can handle this acquisition well and recruit a younger demographic, we might just see this ugly duckling of the Internet turn into a swan.

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Article by Joshua Sauer, edited by Chris Marasco. Neither has a position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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