A tale of acquisitions - Yahoo, Google, AAPL and FB

Yahoo, Goggle, Apple and Facebook have all undertaken acquisitions over the last decade or so. These companies are major players in the internet economy. The internet economy itself has undergone a tremendous transformation, especially with the introduction of smart phones. A successful business model for these companies depends a lot on the network effect. The business and systemic risk involved with these tech firms is tough to predict with certainty, since there is no statistically significant data available from the pure play firms. Here is a look at the acquisition strategy of these companies and how they have fared over the decade.

Stock Return Comparison among Yahoo, Apple, Facebook, Google and S&P Index:

Yahoo: One of the pioneers of the internet media, the company’s stock price has struggled in the recent past as other competitors have overtaken Yahoo in acquiring user base over the internet. While Yahoo finance still is the first choice of source for financial analysts around the globe, its other services such as Yahoo News, Search and Yahoo Mail have struggled to hold onto the user base. Without a strong user base, the advertizing revenues have struggled. Yahoo has gone on an acquisition spree(see acquisitions table below) throughout its life span (source), although not many of these acquisitions have really pushed up its revenues and the free cash flows. Yahoo’s core competency is considered to be its online media capabilities and none of its acquisitions have strengthened its core competency. Its attempt to acquire Daily Motion died, which could have provided an additional platform for its content driven competencies. Yahoo also has undertaken many acqui-hires, acquiring firms mainly to hire their exceptional talent.

Yahoo business risk, measured by its Asset Beta, has varied over a period of time. Its equity beta (see Note** at the bottom), reflecting its business risk and financial leverage, has varied over the period too (see Beta chart below). A higher beta translates to a higher business and equity risk. From the chart below, it looks like the equity risk has gone down after a high initial equity risk, possibly because of increasing penetration of internet around the globe. A high equity risk in the beginning could be attributed to the unproven internet business model in its beginning stages. It’s interesting to note how the equity risk has varied over time, as Yahoo has undertaken its acquisitions.

From the finance info charts below, its quite evident that Yahoo has struggled to get its free cash flows (and revenues) take off over the period of time and the stock market has reacted accordingly, by not showing confidence in the acquisitions or other capital investments undertaken by Yahoo (see Yahoo stock price and its acquisitions chart below). Free cash flows is a key measure of how much shareholder value is being created by the firm and Yahoo seems to be stumbling in this. In recent times, the stock market has cheered Yahoo’s investment in Alibaba more than the Yahoo’s own internal project investments. As the CNN article referred above quotes, Yahoo has to come up with a better strategy to lead in the Social, Mobile, Video space.

Google: This is a company which seems to be dominating the internet economy ever since its inception. Google has become ubiquitous with search and is driving huge revenues with its advertising and analytics. The huge trove of data it has collected from users through its search engine provides it a great leverage.

Google also has undertaken a spate of acquisitions and it seems to be better at turning its acquisitions into revenue contributing engines than its competitors.

It has continued to retain its user base at the same time as venturing into hardware design and telecom infrastructure. As the article here states, it seems be having fluid core competencies, possibly because of its success rate in turning new ventures into competencies. A key area that has lead to Google’s high success rate is its ability to spawn an eco system, lead by its open source Android mobile operating system. It has opened up its API’s to a huge network of developers to contribute to its core competency, thereby enabling a self sustaining eco system. With the advent of Internet of Things, it seems to be poised to collect even more data to add to huge data analytics pile, driving the economy of the future. Its success is duly reflected in the confidence shown by Wall St on Google share price.

Its business and equity risk seems to have stayed pretty constant over the period of time, reflecting the overall economy in general, possibly because of its huge cash reserves and a growing customer base.

Apple: From its core competency of aesthetic design and enhanced user experience, Apple also seems to be utilizing an eco system to sustain itself, as noted in this article. By making it attractive for the app developers to build on its IOS platform, while providing an instantly attractive product, such as the iPhone, Ipad, etc., it has created an enabling cycle and commands a loyal user base.

Most of its acquisitions seem to be adding to its core competence of enhancing the user experience, more so in the mobile space.

Its business and equity risk seems to have stayed pretty constant over the period of time, reflecting the overall economy in general, possibly because of its huge cash reserves and a loyal customer base.

The financial info chart shows the Apple has been able to convert its investments into free cash flows fairly effectively, there by driving its stock price higher.

Facebook (FB): A technology firm that defined the social phenomenon for the world, more specifically for the population of emerging economies, FB has found success in turning its huge user base into a revenue generating cash cow. 

As the article here notes, FB has been able to drive its user base by enabling user authentication services for third party websites, extending its user social network and by its huge collection of user preference data. Its ability to monetize the smart phone users via its digital ads, following the success of Apple and Samsung in creating a huge user base of smart phones, as also contributed to its strong revenue growth.

FB’s acquisitions have not only consolidated the gains in the social networking space but also have allowed FB to venture into adjacent technologies in enhancing user experience.

The business risk of FB seems to be moderate (equity beta of 0.77) compared to its competitors, possibly because it arrived at the market after the internet economy had stabilized and provided sufficient proof for a successful business model.

Through its acquisitions and other innovations, FB has been able to maintain an impressive growth in free cash flows and its stock price seems to be reflecting that.

Source: All the charts were created using data from yahoo finance and ycharts. 
Note**: The historic returns for previous 36 months was used to regress the individual stock with S&P returns and equity beta was calculated using that.
Note***: The acquisitions timeline depicted on the stock return chart is an approximation