When Jeff Ma co-founded Citizen Sports in 2004, he planned to run it, not sell it. But when Yahoo came calling with an offer to acquire the social media sports company for a reported $30 million, Ma and his fellow entrepreneurs found the offer too good to resist.
Today Ma is working on another startup that is still in stealth mode, so he’s reluctant to talk about it. He’s not reluctant, however, to discuss what it was like to be acquired by Yahoo—a conversation that may may have particular relevance for Yahoo itself, as the company has persistently been mentioned as a candidate for acquisition by companies like Google and, most recently, Microsoft.
Ma reports being acquired was good, especially compared to not being acquired. “There are tons of things that can derail a deal,” he says. “When a deal actually happens, especially with a company like Yahoo, for us it was a very fortunate thing.”
Yahoo has brought similar good fortune to dozens of companies. They range from pioneer search engine Net Controls, Yahoo’s first acquisition for $1.4 million back in 1997, to Broadcast.com, the Internet radio company it bought for $5.7 billion. The Broadcast deal is notable for being Yahoo’s biggest to date and for bankrolling Broadcast co-founder Mark Cuban’s rise to billionaire status and high-profile owner of the Dallas Mavericks of the National Basketball Association.
Unfortunately, not all acquisitions work so well. Loyal employees may get pink-slipped because the acquirer already has people doing their jobs. Sometimes, acquirers seem interested only in part of the acquired company and end up laying off whole departments, closing offices and shuttering product lines.
One way to tell if an acquisition is likely to work out is to examine the relationship between the companies before the deal goes down, says Jim Ellis, a lecturer in entrepreneurship at Stanford Business School. Ellis has sat on the boards of several companies that were acquired. His own company, Asurion, has acquired a few smaller firms, as well.
Entrepreneurs should not assume relations between acquisition and acquirer will improve after the contracts are signed. “Anticipate you’re going to see more of the same, if not additional things that haven’t come out,” Ellis advises.
And be ready to take a while to get the deal done. “Six months is common and up to a year is not out of the realm of reason,” Ellis says. That can be a problem because, inevitably, negotiating the deal distracts entrepreneurs from running the company.
If sales or profits slump, or new products don’t come out on time, the acquirer may seek a lower price, Ellis warns. Founders who are selling a company have to be prepared for the distractions and try to minimize them, or risk the deal falling apart altogether.
While entrepreneurs in the middle of a negotiation need to keep their eye on being acquired, if you don’t have an active offer on the table, you should run your business as if you plan to keep it forever, says David Zinman, who was a top executive at BlueLithium ad network when Yahoo bought it for $300 million in 2007. “It’s really important to get across that you can’t build your company to sell,” Zinman says. “I have never seen that work and I don’t believe the stories of people who say they’ve done it.”
The problem with building a business to sell is that entrepreneurs may skip investments that they would make if they planned to keep the company, Ellis says. Acquirers who do their due diligence notice the skimping, and it can effect whether or not they want to buy the company.
That doesn’t mean there’s nothing you can do to increase your appeal should an acquirer happen along. You’ll get the biggest bang for your buck by improving managerial and accounting systems and making sure you’re operating by the book, Ellis says. If you’ve made necessary investments and have well-documented processes, you’ll make your business more attractive to potential acquirers while also making it more efficient and profitable, he says. That can be helpful in case no buyer ever appears.
You want to maximize your sale price because people who sell companies often find themselves out of a job. The Yahoo acquisition of BlueLithium was different for Zinman, who joined the acquirer as vice president and general manager for display advertising. He left Yahoo in 2011 and today is chief operating officer at Inadco, a Palo Alto, Calif., online advertising startup.
For Zinman, his time at Yahoo was positive. Part of that was because he enjoyed doing approximately the same job, but with many times the resources. It helped that the acquisition was positive, too. And the reasons it went so well, he says, come down to some pretty pedestrian-sounding considerations.
One of the key elements was the fact that Yahoo’s headquarters in Sunnyvale wasn’t far from BlueLithium’s base of operations in San Jose. “So for the vast majority of employers, there was no disruption of their commute,” Zinman says. “That was really important.”
Another positive factor was that the skills of most BlueLithium employees complemented rather than duplicated what Yahoo had. “As a result the acquirer was very desirous to learn what we do and we didn’t spend a lot of time battling over turf,” Zinman says.
For Ma, the acquisition didn’t happen entirely as he’d hoped. For instance, Yahoo seemed more interested in the people at Citizen Sports than the products. Ma’s co-founder Mike Kerns became a Yahoo employee and is now vice president of social and personalization. But Citizen Sports’s apps for connecting activities like fantasy football with social networking sites like Facebook haven’t been as broadly implemented as Ma had hoped.
Ma is forgiving, however, because he’s aware that acquisitions are risky for the acquirer. “You kind of respect any decision the company makes because they’re playing against the odds and they are trying to make this work,” he says.
Odds makers in Silicon Valley these days are trying to figure out whether Yahoo will be involved in its biggest deal ever, this time as the acquisition. Ellis thinks Yahoo will do something huge eventually. “If you’re Yahoo you either have to acquire and become one of the big boys on the block or you have to be willing to be bought,” he says.
Zinman, fresh from his stint at the SVP level at Yahoo, professes to be puzzled by talks of Yahoo needing a rescuer. He notes that in its most recent quarter it reported more than $1 billion in profits on $5 billion in revenue, and has over $2 billion in cash. “Yahoo,” he says, “is the most financially successful troubled company on the planet.”
Should Yahoo be acquired, it won’t be much like when BlueLithium, Citizen Sports or any of the other dozens of companies Yahoo has bought were gobbled up. But if the sellers are like Zinman, they’ll enjoy it. “It was a great experience for me,” he says.
Ma, for his part, hopes that if Yahoo is bought the purchaser will treat it with respect. “Yahoo still represents a lot symbolically to us entrepreneurs in Silicon Valley,” he says. “We don’t want to see it ripped apart.”