What makes a good acquisition?

I’ve experienced two acquisitions in my operating career. One, the acquisition of Instagram by Facebook, went incredibly well. The other, Yahoo’s purchase of Tumblr, went horribly wrong. Both were social media companies purchased by internet giants for $1B. Both were considered to be widely overvalued at the time of purchase. But while Instagram was valued last year at more than $100B Tumblr was sold for 1/333 of what Yahoo paid for. Although sources close to the deal posit that Verizon probably exchanged Tumblr for a percentage stake in Automattic and the $3M was a head cover. It felt like a blow to everyone who believed in the social value of what Tumblr built. I personally felt sad from the unactualized potential of Tumblr to have fallen through three different acquisitions (Yahoo, Verizon, and Automattic). 

Why did Tumblr struggle to monetize its content under Yahoo while Instagram was able to harness the growth engine and ads platform of Facebook? When Marissa Mayer bought the company in 2013 she famously wrote on the platform, “We promise not to screw it up.” With such good intent, what went wrong? 

At Tumblr I saw first hand the challenges of monetizing content and integrating with the Yahoo ads platform. Tumblr and Yahoo did not see eye to eye when it came to audiences and ad products. That incongruence stymied monetization efforts. Yahoo ad properties skewed much older which is why social security ads do well in Yahoo Mail. However, Tumblr’s target demographic was young (<20 years old). From a sales perspective, Tumblr knew its value was similar to Snapchat targeting the younger Gen Z and millennial population. Yahoo unfortunately never accepted Tumblr’s unique audience. They didn’t understand that Tumblr’s ads had unique social engagement which meant you could get “free” earned engagement from reblogs of ads--arguably cheaper ads. The right content-audience match meant Tumblr ads could travel further on the network as evergreen content compared to Snapchat or Instagram. Yahoo’s flat out refusal to see this unique value created so much stalemate that roadmaps and product decisions were often frozen. Forcing the paid search ad model on Tumblr instead of harnessing its unique value proposition created a losing situation for Yahoo and Tumblr. 

Meanwhile at Instagram, Facebook gave the company the room and space to grow its organic content community. It wasn’t until year 3 of the acquisition did Facebook start taking a more hands on approach to growth and monetization. Kevin Systrom took growth classes with Alex Schultz, the father of growth at FB. FB lent its growth PMs to help expand Instagram into new markets like Europe and Japan. Monetization was done in a thoughtful manner as well. Kevin Systrom reviewed every single ad for a whole year to make sure it was Instagram-friendly in aesthetic and content. To this day, I admire the attention to detail and the respect Facebook had for Instagram early on. As a buyer, Facebook respected that Instagram knew how to best build a community through photo sharing. Instagram and Facebook embodied mutual trust and respect, making it a great marriage. 

Curious to learn more, I asked Samsung NEXT’s Senior Director of M&A Tim Casio on what makes a good acquisition. If you’re a founder considering selling your company or a buyer considering purchasing another, this post is for you. 

According to Tim, successful M&A is like a good marriage based on shared values and honesty. 

• A good acquisition shares value creation on both the buyer and the seller side. Value creation can be measured through organization and cultural change. For example, a hardware company will acquire a startup to help put a new software lens on its operations. 
• Corporate marriages, like real marriages, are based on open and honest communication. There needs to be mutual communication between the buyer and seller. 
• Companies should front load their potential issues by being honest with each other at the start of the M&A process. If a founder can’t be honest in the beginning with their buyer, then it’s probably not a good fit. 
• Good mergers and acquisitions are not adversarial, but rather equitable. Each side should have a vested interest in making the other side happy. 

There are many things that could go wrong in an acquisition, so how can founders better equip themselves to go through the process? 

• There is an inherent asymmetry in information between the buyer and the seller. Buyers have a lot more experience buying than sellers selling. Therefore, it behooves you as the seller to find an advisor. If you are a small company you should pay for a consultant who has experience in M&A, corporate development, or accounting to help you through the process. 
• Sometimes it’s easier to negotiate through an advisor than to speak directly to the buyer. 
• Have a clear understanding of why: As the seller, make sure you are clear about your intention. As a startup founder, practice framing your Why to the buyer. You need to have a clear conversation with yourself about what you will accomplish through selling your company.

After an acquisition, the honeymoon period fades and reality sets in. I’ve noticed that with each founder I’ve worked with post-acquisition, the integration process is super critical. It’s hard for a founder to realize that they are no longer the primary driver of scaling and growing a product anymore. 

That reality is not just emotionally difficult but also existentially difficult to accept. Oftentimes the archetype of a founder is someone who is considered to be “unhireable” -- but in a good way. They do not deal well with bureaucracy and often don’t answer to authority. These martyrs become visionaries but often have a difficult time integrating into a larger company.  

When it comes to a happy or sad acquisition like any marriage both sides need to demonstrate mutual respect, trust, honesty, and communication. Aside from the financial aspect of an acquisition it’s no rocket science that the main tenets of a good corporate marriage also begets more revenue, growth, and brand equity. As a buyer, do your due diligence and communicate what value you see in the selling company. As a seller, introspect and be upfront about what you want out of the acquisition. Know when to walk away early when it’s not a good fit. Like all good marriages, honesty and open communication sets the tone and dynamic from the beginning. What I’ve learned from Tumblr is that integrity is not how you start something but rather how you end something.