Newly independent Aol is still struggling with the fate of Bebo, the social network they acquired for $850 million in 2008.
No one argues that Aol underpaid for Bebo. And the social network has fallen from 22 million monthly unique visitors when it was acquired to just 14.6 million today (Comscore worldwide). But even so, Bebo clearly has some value on the open market.
Despite that value, Aol’s best financial option for Bebo will likely be to abandon it rather than sell it, say corporate tax experts we’ve spoken with.
Here’s why – complicated corporate tax rules will let Aol write off the full purchase price of Bebo if they declare it worthless and abandon the asset. With Aol’s effective tax rate of around 45%, that’s $380 million and change in their pocket in taxes that they’d be able to avoid.
A sale of Bebo would almost certainly be less attractive. If someone were to pay them $100 million for the service, which is optimistic, Aol could still offset the remaining $750 million as a tax loss. But it could only apply against long term capital gains, and Aol doesn’t have any to offset against. They’d have to carry that loss forward and hope for future gains to offset it against.
One corporate tax attorney we spoke with wouldn’t discuss Aol specifically, but did confirm the logic of the approach. Bryan Smith, a partner at Perkins Coie, says “Without getting into any specific facts or companies, it will often be more attractive for a U.S. corporation to simply shut down a subsidiary and claim a deduction for the worthlessness of the stock against ordinary income instead of selling the stock at a distressed price and taking a capital loss, which may only offset capital gains.”
If Aol were to abandon Bebo they couldn’t pull any of the assets of the company back into Aol, say the experts we’ve spoken with. Otherwise it becomes a non-taxable liquidation. If Aol had debt or preferred stock on the books with Bebo, though, they could pull out assets to offset that liability.
Abandon Bebo? But that 14.6 million monthly unique visitors should bring some revenue.
u know squat about finance, so do your experts. Y don’t u stick to your job??
I bet you can’t fathom the idiocy with this social network site, can you?
thats what they thought when they bought bebo
If they “abandon it”, does that mean it has to be wound down? Or can it be just left, well floating? Can someone else start running it and paying the server bills without actually buying it?
I don’t have an account or anything, just curious.
+1. And if that revenue is enough to pay for the servers, maybe they could Open Source it?
No! don’t abandon it! I have a bit app on bebo
What the heck is up with these large companies not being innovative?
If I was CEO of BeBo I would build a ton of apps and services and utilize the traffic to help build the popularity of other services and apps.
For example making games, iphone/android apps and using the traffic to help make them popular.
Then once certain apps became popular I would blend them into other Social Networks like Facebook.
Using the Bebo traffic to help find new ideas for apps would be another route.
Bebo could easily make several hundred million in sales and grow 100+ new companies a year. Out of all that action some hot companies, products, apps, services would spring up and blow that $850 million investment right out of the water!
But to sell it for less than you paid and not go down fighting is really wrong.
I would most likely build 3 development teams.
1) India, 2) China and 3) would be in USA as the lead team.
Basically Bebo COULD be a cash cow! But noooo instead AOL sits there and claims it is not doing well and all that bla bla stuff.
Really lame!
except for a few companies, the whole web 2.0 space is a giant ponzi scheme.
No one ever talks about financial fundamentals, but everyone loves to hype.
So ask yourself, was Bebo making AOL any profit on those 14M users?
The web social space is akin to the clubbing business. You need to hype up your club, get users for a short period, sell, and move out of dodge, before the next it club opens.
nice take on web 2.0
But thankfully Arrington has discovered a new way to value these companies and justify continued hype. Loss is the new win in the valley.
AOL? Is that still around?
And their off. Aol, MySpace and Yahoo racing to see who completely fails first due to total incompetence. Writedowns, loss of talent and lack innovation and vision. Quite a race to watch.
They moved the Bebo people from their own seperate building to the Main AOL site in SF. (I think corporate HQ is in Sunnyvale?) I got the impression they were winding them down. Or at least consolidating them. The old Bebo HQ had a kind of Web 1.0 vibe. Not AOL, very pre-web vibe still!
I wonder if that won’t be far more difficult than it sounds. It’s one thing to abandon an asset like a car or a computer, but an entire company? There are the physical assets, servers, desks, whatever. There are trademarks and such. There is basic assets like cash, receivables. If they start selling all the assets in the company.
Although they might be able to gut it then abandon it, fire everyone, sell everything internally, then pay a huge dividend or whatever to AOL to get the cash out then abandon it.
hey Michael,
This makes sense. Could Aol, as they’re calling themselves, not simply keep the site running (perhaps without ads to bring in zero revenue) and declare its value worthless to get the biggest tax loss as you wrote or do they actually have to shut the site down?
It doesn’t really matter to me one or the other as I’m not even a member of that social networking site.
Cheers,
Doug
P.S. Any word on who Aol has chosen to sell ICQ to? And have you heard if Yahoo! has indeed shelved plans to sell Yahoo! Small Business as has been rumoured on AllthingsD?
whatever Bebo.com cant do Patch.com will cover?
YOU, the American tax payer, just lost $850 million.
AOL is a public company that used your pension funds to pay for Bebo. You paid for it, you lost it through your RIA or direct mutual funds holdings.
The MBAs who did this stupid deal still have jobs, play Golf and enjoy life. Don’t laugh at AOL, it was you who paid the bill.
Boy, you are really making a stretch to connect losses to taxpayers. Plus, even accepting the possiblity that any government pension holders lost on an investment here, to come up with the specific amount of $850 million lost by taxpayers is straight up stupid.
I don’t know what finance classes you took but I think you were sleeping through most of it.
it’s the most legitimate tax break you can get.
Umm.. that’s quite a stretch. Public pension funds invest in a wide range of domestic and global equities, in addition to large fixed income components, and the stakes in each equity are so miniscule because they’re so diversified. Unless the pension fund made a private placement into Aol (as they call themselves now) with a very large equity stake (and I don’t believe that’s the case), then you can’t tie that loss of $850 million to the pension fund. Nor can you can tie the pension fund back to the government – unless that pension fund has such a huge shortfall that it needs to be bailed out itself by taxpayers to cover payments to retirees. Even though, that’s a failure of pension fund management, not its individual investments.
Get your facts straight please, ma’am. :)
Cheers,
Doug
Here’s what needs to happen.
1. Michael Birch or some other interested party starts a non-profit called BeboFree.org.
2. AOL donates Bebo to BeboFree.org. They write off the donation on their taxes.
3. BeboFree.org keeps Bebo humming, adds more features, and competes with Facebook as “the good guy” social network that doesn’t steal your personal info.
This may sound odd, but that’s more or less what IBM did when it donated the Cloudscape DBMS to the Apache Foundation, which re-named it Derby. Now Derby is used all over the place and IBM got their $100M tax deduction….
No matter what they decide to do, I’m glad I didn’t buy any Aol stock.
Oh, you mean the typical “I CAN’T SELL LEMONDADE FOR 15cents” type CANT MONETIZE on 14MILLION USER. Ahhhhhhhhhhh, what frat boyz. I on the other hand “SO BELOW THEM” as a business person is bringing in $6,000 a month with 1/125 of that amount. ((LITTLE FRAT BOYS WITH MBAa != ABILITY))(reality)
Underpaid for BeBo??
Yeah pretty sure he meant overpaid
Check that… he said… “No one argues that Aol underpaid for Bebo.” … as in… most people think AOL overpaid for Bebo.
Are you saying Google will abandon YouTube if they lose the case?
It would appear that AOL didn’t even try to consolidate Bebo into their WebOps – a traceroute shows http://www.bebo.com going to Akamai.
Imagine if they abandon it and declare it (and it’s revenues) the property of its users? Now that would make for an interesting world…
@lloyd you would loose your house moron! Do you think Bebo makes any money? Donkey you would be in the poor house. Crap technology, crap people and users that are plain ignorant.
Nuke Bebo! let the POS die in peace.
It will be a sad development if Bebo goes off the radar. I hope AOL doesn’t abandon Bebo.
Effective tax rates of 45%, stupid laws that make abandoning assets more profitable than selling them… I can’t believe TechCrunch doesn’t spend more time railing against government regulations. Guest posts do discuss the insanity of denying visas to skilled migrants, but that’s about the extent of it.
Government kills innovation and stifles business. I know things are worse in Europe and the rest of the world, but that’s no excuse. It’s sad to see we are no longer leading the free world, but screaming for more bureaucratic control from Washington (in health-care, financial regulation, etc)
AMEN! Couldn’t have said it better. Government is a leech that destroys. Period. Business, healthcare, regulations. We were once the beacon of freedom, now we’re a dying empire.
somebody’s got to pay for free health care.
Sucks for the people who work there that our tax policy makes it advantageous to shut down the operation and fire them instead finding a buyer
As influential as AOL has been in the online industry – let’s face it, people are more aware of bebo than AOL, especially when it comes to the younger generations.
Joining the online party is always a risk, and the economy has suffered in all industries, which is why companies are now using Social Media to reconnect with the lost audience.
For further info on how to find the right tribe you want to target please check out my blog and short webcast discussing the tribal and party elements of Social Media.
http://missheerah.wordpress.com/2010/02/19/new-media-webcast-social-media/
Thanks!
People are not more aware of Bebo than they are of AOL, at least not in the US. Overseas, maybe, but the US AOL users who are aware of it simply can’t stand it. They hate that AIM profiles were taken away and that they have to sign in with Bebo instead to see any profiles at all…acquiring Bebo was a bad move on AOL’s part unless they don’t care about monetizing their US demographic, honestly. It’s an oversea outfit and will never catch on here.
As a former bebo employee, this is very sad on a personal level – but not really a surprise.
1. It would be kind of cool if tech crunch could update the bebo logo displayed in this article. It’s more than a year out of date and all you guys gotta do is grab a screenshot from the home page (while it still exists).
2. People shouldn’t worry about the employees getting laid off. There was plenty of warning and most who were smart already took severance packages worth months of pay on top of retention bonuses. The sad part was that they initially laid off the customer service team in Austin with no warning. Note to AOL, not a good idea to fire customer service at a new acquisition – they are the ears for engineering and a critical part of the user feedback loop. Former bebo employees have started at least half a dozen new startups – benefiting the bay and the whole software industry.
3. None of the suggestions listed in any of the comments above would ever have been enough to save bebo from AOL or itself. There was never a lack of quality input from users OR employees, only a broken feedback mechanism and management team blindly intent on achieving goals that did more harm than good.
4. Integrating bebo with AIM was a total failure because they never stopped to think that they are not just integrating networks of computers, but networks of people – and these two groups were very different! When 10 million users from AIM Pages were suddenly dumped into bebo, the management decided to simultaneously launch a new un-tested profile layout for existing users. The result was utter chaos. They actually managed to piss off two entire social networks in one week. More then half of the migrated AIM users bailed within a month… to Facebook likely.
5. Monetizing a social network is very hard without big budget direct sales paving the way. Premium advertisers bailed about as fast as the users, forcing the sales team to give up. On top of that, platform A refused to sell bebo inventory, because AOL never gave them an incentive or reason to help sell bebo! It costs about 20 million a year to run bebo, which has not been profitable since right after the sale. AOL thinks bebo is still worth $75-100M. Even if AOL sells bebo for $75M, the buyer would be stuck $95M in red the first year and they would have to hire quite a few people since the current staff is just a skeleton of a team.
6. The codebase… your 100M is better spent elsewhere, trust me.
this is really nice article
It comes down to this, there are users out there at appreciate bebo. They are the ones supporting bebo, they are the ones that enjoy it.
If money doesnt make the world go round as the saying goes, leave bebo as it is with those who care about it and STILL use it every day.
Read the petitions keep an open mind about it.