Reading the Tea Leaves on Yahoo’s Future M&A

In addressing Yahoo analysts and investors publicly for the first time during Monday’s Q3 earnings call, CEO Marissa Mayer indicated she would continue a strategy employed during her years at Google: primarily purchases in the “double-digit millions,” rarely exceeding $100 million.

Mayer didn’t mention companies  that have been the subject of recent rumor, namely mobile restaurant reservation service Open Table, supply side platforms PubMatic and Rubicon Project, and media buying software provider Mediaocean. These three companies fall into the smartphone and ad tech categories, which Mayer has said she wants to build up.

The problem is that each of those entities would likely cost Yahoo more than the $100 million threshold Mayer has set down, and would invite reprisals from activist shareholders who do not want to see profits decrease or wait until a costly purchase begins to pay off down the road.

Yahoo can look to AOL’s $315 million acquisition of The Huffington Post two years ago as a cautionary tale, said Jefferies & Co. analyst Brian Pitz, in an interview with AdExchanger. “AOL’s stock dropped after it purchased HuffPo and the company continued to be pressured to show that its acquisition of [hyperlocal content network] Patch would produce returns to justify owning it,” Pitz said. “It’s going to be tricky for them not to dilute themselves if they purchase something at $100 million. I don’t think investors who have been pleased at Yahoo’s story starting to turn around would like to see the stock take a hit and then be asked for more patience again.”

Pitz is doubtful that Yahoo is going to make a play for Open Table, since, aside from the price, it’s more locally focused and Mayer said during the call that it was a tough area to get right and required too much investment.

He does think Yahoo should take a closer look at mobile ad networks, though he declined to specify. Some observers have mentioned Millennial Media and Rhythm NewMedia as possibilities, for example.

Tim Hanlon, CEO, The Vertere Group, also thinks that Yahoo should look at mobile first and foremost, even going so far as to re-invent itself into a mobile/device-centric company to reflect audiences shifting to smartphone and tablet usage, and away from the desktop.”Marissa has, I believe, a rare chance to enable Yahoo a ‘do-over’ as devices and mobility disrupt the web-centric approach to digital content and marketing that has dominated over the last 15-plus years,” Hanlon told us.

Hanlon also provided us with a list of players that Yahoo should consider in terms of either building, buying or partnering:

• Location-based targeting data/infrastructure (e.g., Placecast, Shopkick, Retailigence, Moasis, etc.)
• Video and audio content infrastructure for mobile/device environments (e.g., Ooyala, TuneIn, GoldSpot, etc.)
• Advertising infrastructure for mobile/device environments (e.g., Medialets, FreeWheel, TargetSpot, mobile/device-ready SSPs [PubMatic, Rubicon], etc.)
• Device/media interoperability/synch technology that compliments/supplements Yahoo-owned ACR  [“automated content recognition”] play IntoNow (e.g., WyWy, Shazam, Zeebox, etc.)

Pivotal Research analyst Brian Wieser was a little dubious about some of the rumors swirling around Yahoo’s supposed acquisition targets (“some of which – like Mediaocean – make no obvious sense to me,” he told AdExchanger), characterizing them as little more than trial balloons.

“Of course, if they were actually interested [in buying those rumored acquisition targets] it would not serve them well to convey that they are, so it remains a possibility,” Wieser added. “That said, the stated priorities of the company at the present time appear to be centered more around improving what the company is already doing, and in particular, accelerating the company’s shift into developing its products for mobile environments.  Acquisitions which facilitate that transition – and in particular which employ engineers necessary to do as much – would seemingly be a priority.”

When it comes to what Yahoo should do when it comes to ad tech, the company already has a number of properties that it has continually had to sort out. For example, it bought ad exchange platform Right Media in 2007 for $680 million — and struggled, up until recently, to demonstrate what it wanted to do with it. And just before Mayer arrived, Yahoo launched its Genome data management offering in May as a sign that it was going to get more serious about programmatic buying. Genome, it should be noted, grew out of Yahoo’s November 2011 purchase of interclick.

Even with those two properties, Jefferies’ Pitz sees room for more acquisitions that can close the real-time bidding loop the way Google has with demand side platform Invite Media and SSP AdMeld, which both surround its DoubleClick Ad Exchange.

“The range of DSPs, SSPs and ad exchange platforms is still wide and fairly confusing to Madison Avenue, which means that it’s an area ripe for consolidation,” Pitz said. “From that standpoint, Yahoo has an advantage when it does decide to get serious about buying something in that space.”