One of the safest bets in the corporate world is that a splashy acquisition will end up disappointing. You won’t make money every time you take that bet — Google’s purchase of Android sure paid off, for instance — but the successes are more than balanced by disasters like the merger of AOL and Time Warner, which famously lost more than 80% of its combined market cap over a decade, or News Corp buying MySpace for $580 million in 2005 and selling it in 2011 for $35 million.
Yahoo! CEO Marissa Mayer acknowledged the long odds of making the $1.1 billion Tumblr deal pay off when she said that the 14,000-employee company would work very hard to ensure it didn’t “screw it up” by imposing Yahoo!’s more established ways on the 200-employee start-up. And so she’s indicted that Tumblr team will maintain its independence within Yahoo!
But Mayer and her team should act more boldly to integrate the micro-blogging site, because keeping Tumblr too separate would be a major strategic mistake.
Our research (discussed in detail in a 2011 Harvard Business Review article one of us coauthored) distinguished between two basic types of acquisitions. In the first kind, a company acquires another to strengthen its current business model. We call such deals “leverage my business model” (LBM) acquisitions. Google’s 2005 purchase of YouTube fits into this category. Google wanted to apply its core contextual advertising business to the video-sharing site’s surging audience. The $1.6 billion acquisition appears to have paid off handsomely, as YouTube has grown substantially as an advertising platform.
In the second case, a company uses an acquisition to “reinvent my business model” (RBM), or at least diversify its business strategy. Best Buy’s purchase of Geek Squad fits into this category. Best Buy historically made its money by selling products; Geek Squad provided affordable IT services to individuals and small businesses. Google’s buyout of Android also fits into this category, adding the licensing of telecom-operating software to its main business model of contextual advertising.
The way a company integrates an acquisition depends on which type of acquisition it is. Generally speaking, when you’re buying a company to improve your existing business model’s effectiveness, you should fold the acquired company into your operations. But when you buy a company for its promising business model, it’s vital to keep it intact — by running it under a separate management structure. Although Geek Squad appears to be operating within Best Buy’s retail shops, it remains a service business, managed separately from the retail operation. And in both cases, integration should always be done carefully, with an eye toward managing the inevitable pockets of incompatibility.
Tumblr’s business model barely exists, as it reportedly made only $13 million in revenue last year by selling advertising. So it’s not really not possible for Yahoo! to be acquiring it as an RBM.
Scott Anthony is the managing partner of Innosight. Andrew Waldeck is a senior partner at Innosight.