Can Mayer’s Aggressive Acquisition Spree Drive Revenue Growth At Yahoo?

Next Story

Zynga To Shut Down OMGPOP’s Online Gaming Portal, OMGPOP.com

Yahoo continued its acquisition spree last week, picking up RockMelt’s team. The company’s product will be all but instantly axed. Yahoo’s senior vice president of mobile wrote the blog post announcing the hire purchase, so it is not hard to see where RockMelt’s employees are headed.

It joins a string of companies, often small and directionless, that Yahoo has scooped up to help fuel its new mobile focus. Yahoo has been successful at finding firms that might be packed with developers that are otherwise hard to hire, and buying the operation wholesale. I’ve lost track of the number of acquisitions, but it’s nearing two dozen since Marissa Mayer took over at Yahoo’s helm.

It’s time to ask a new question: At what point does Yahoo’s aggressive purchase of outside firms to bolster its internal development corps help it grow its revenue? It is fair to say that under Mayer, Yahoo has undergone transformation in several ways: Internal culture and morale have improved, the company has made big bets on new demographics, and, yes, it has greatly expanded its pool of mobile developer talent that has helped the company grow its mobile usership.

However, those successful efforts have not yet translated to new top line incomes. In short, Yahoo’s reformation has been undertaken during a period of revenue decline; Yahoo’s business is bringing in fewer dollars than it once did. In the second quarter, for example, Yahoo’s GAAP revenue slipped 7%, to $1.13 billion.

Every new CEO should be granted a period of clemency, during which they can make initial reforms to the company that they now run. It takes time to institute change, and so for the first few quarters of a new CEO’s tenure, a respectful position of reasonable doubt is fair. However, that time expires, after which the CEO’s strategy can be measured on its own merits.

Mayer has executed her plan well, as we noted before. If she had not succeeded at creating a better vibe at Yahoo, I’d argue that her ability to hire through acquihire would have been greatly lessened; a less cool Yahoo would be a less exciting potential new home for an ailing startup.

We can therefore begin to judge the strategy’s efficacy. You might argue that it will take more than four quarters to reform a company as old, and large as Yahoo. That’s a reasonable point, but we can also look for signals as to the company’s direction.

Revenue at Yahoo managed to grow by a slim $21 million in the fourth quarter of 2012, on a year over year basis. But thus far in 2013, Yahoo has posted two quarter of consistent revenue decline, again comparing year ago quarters to the current. Perhaps more troubling, Yahoo has had its revenue decline sequentially as well, with the most recent quarter bringing in less than the directly preceding now for both of 2013′s reported quarters.

Yahoo is in no short-term danger. It’s a fantastically wealthy company, and one that has time to find new revenue sources. However, there is a question of pace at work here. When does the new mobile development talent, bought with dollars that could have been returned to shareholders, help Yahoo grow? Until Yahoo can demonstrate consistent revenue growth, Mayer’s strategy will remain unvalidated, and investors could lose at least some of the new faith that they have found in the company.

There are two simple ways that Yahoo could grow its top line, when thinking from the perspective of the companies that it has recently purchased: New talent drives higher usage of new and existing mobile applications, boosting ad income; or, Tumblr is functionally monetized, adding a new revenue column for Yahoo. However, Yahoo is likely hesitant to extract headlong financial return from Tumblr, and building mobile application market share in an ecosystem where every competitor has their own platform, and you don’t, isn’t a simple task.

There is no indication that Yahoo is done hiring through purchase. Criticism of that strategy is in the market, as is defense of what we could call the Mayer Way. Is the criticism fair, that Yahoo is becoming a receptacle for failed companies? Somewhat, but here’s the other side of the coin:

Wouldn’t it just be cheaper and easier to hire programmers on the open market or right out of college? Actually, no. The competition for developer talent in Silicon Valley today is insane. Take this recent piece from San Francisco Magazine describing the day Zynga laid off several hundred employees. Recruiters tried to hire freshly axed programmers in the comment section of news stories about the firings.

The Verge goes on to quote Bloomberg Businessweekstating that Yahoo is locking newly purchased engineers into two and four-year contracts. AllThingsD thinks that Yahoo paid between $60 and $70 million for RockMelt. If it had 100 employees, Yahoo paid $600,000 to $700,000 per. If they only signed two-year contracts, before salary and the rest Yahoo shelled out hundreds of thousands of dollars per year for each new Yahoo-er.

That’s not cheap.

Yahoo needs to show in the second half of 2013 that it can grow its revenues, charting a new direction north. It would be even better, frankly, if Yahoo could directly draw a line between its current expenditures and new incomes, but that might be hard to directly demonstrate. I wouldn’t even expect that. But spending cash to increase overhead in the face of sliding revenue is a tough course to chart indefinitely.

Undoubtedly Yahoo is better off now than it was before the arrival of Mayer. But a business is the sum of its cashflows, and while they slip, no company can claim full health.

Top Image Credit: Yahoo!