communication – Paul J. Siegenthaler

Does $ 1.1 bn buy you “coolness”

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22 May 2013
Paul Siegenthaler
Business case, Driving change, M&A Strategy

Yahoo! chief executive Marissa Mayer’s move to acquire the blogging website Tumblr for an astonishing $ 1.1 bn is indeed a bold one. As a former Google executive Ms Mayer hopefully knows things about what makes a website “cool” and fashionable which we other mortals ignore : how else could one explain the rationale behind paying a premium of $ 300 million above the previous valuation of Tumblr ?

I felt some reassurance reading Ms Mayer’s statement declaring that Tumblr would continue to operate independently so as “not to screw it up”. More importantly Tumblr’s co-founder and 26 year-old chief executive Mark Karp will remain at the helm of Tumblr – or that is at least the initial intention. Indeed, the huge challenge in this deal will be to insure that Tumblr with its young boss and 125 strong team who probably revere him as an icon – quite justifiably – can maintain the buzz, energy, creative enthusiasm and ability to “break the conventional rules” which characterize the most successful companies of the internet age.

The colour purple – will it run in the wash ?

I don’t subscribe to the view of those who believe that every bubbly creative exciting entrepreneurial company is doomed to becoming a boring fat corporation if it grows much larger, victims of its own success. Huge companies such as Apple and Google are proof to the contrary, as is Virgin Group if we look beyond the frontiers of the technology sector; but it is true that those iconic companies are the exception rather than the rule.

Unsurprisingly, Tumblr’s users are sceptical, as evidenced by tweets of “No, no, no, nooooooo!” and “Tumblr is about to suck”. Young Mark Karp is trying to reassure them, stating that “We’re not turning purple”. I like the analogy, and personally I would be weary of mixing bright vivid colours with dark purple in a same wash-load …

When a high buzz “cool” company is united with another that has become lacklustre over the years, does the former’s “coolness” revive the dull company, just as an antibiotic gets rid of an infection, or will it gradually dilute and fade away? This is indeed the $ 1.1 billion question in the acquisition of Tumblr by Yahoo!

Solid business case or act of faith ?

If Yahoo! and Tumblr continue to operate and appear on the internet as totally distinct platforms, one fails to see what it is about Tumblr that will attract traffic to Yahoo! It is hard to believe that the look and feel of Yahoo! would appeal to Tumblr users, and loading Tumblr with links to drive viewers to Yahoo! might cause frustration and irritation … Tumblr is on the rise, Yahoo! is in decline, so it is quite clear which of the two is in urgent need of profound transformation.

“Coolness” is the outcome of a specific style, flair and contagious energy of the person or team at the helm of a business, which must percolate through the entire company. What is it that makes a restaurant or bar “the” fashionable place to go to in a city? There is no recipe for coolness and trendiness, and remaining on top of the “cool” wave requires an ability to constantly come up with something new as competitors are fast to copy whatever they believe consumers find so attractive.

There might be some transfer of knowledge and consumer insights from Tumblr to Yahoo! but $1.1bn is a high price to pay for that learning experience, if indeed it does occur. For a start, it would not have cost much to redesign the Yahoo! interface as we all know that cluttered screens are a total turn-off for most audiences. If that transformation does not occur fast, Yahoo! will be left with the continuing issue of declining audiences and the benefits case of the Tumblr acquisition will rest entirely on the ability to massively increasing income from advertising. Whether Yahoo!’s current advertisers will want to associate their brands and services with some of the more politically controversial or sexually explicit content of the Tumblr platform remains to be seen.

Yahoo!’s track record in M&A is a mixed one; GeoCities which was acquired in 1999 was canned 10 years later. A wave of further acquisitions in 2004-2005, notably that of Flickr, failed to infuse the “coolness” Yahoo! was seeking, but that was before the days of Marissa Mayer. Yahoo!’s board and shareholders have made an act of faith in believing that Ms Mayer is the charismatic leader who will send a positive shockwave through the company, put the negativity of years of decline behind and turn Yahoo! into a stylish platform. Let’s hope they are right.

This kind of act of faith feels similar to wearing a new prototype of mechanical wings whilst standing on the edge of a cliff. And then you jump : Yahoooooooooooo !

Office Depot and OfficeMax Merger Communication Blunder : Poor Timing or Lack of Content?

Office Depot’s Chairman and CEO Neil Austrian can point an accusing finger to Thomson Reuters for prematurely releasing a bulletin announcing that his company was in advanced merger talks with OfficeMax, but the real issue is one of content rather than timing. Good preparation and excellent communication are so crucially important throughout the M&A process, from the initial declaration of intent until the end of the integration process : the recent Office Depot & OfficeMax incident might one day become a business school case study of how some companies can get it so wrong.

Let’s forget for a moment the fact that someone at Thomson Reuters pressed a button a little too soon; the merger announcement had been drafted and was only awaiting Office Depot’s green light to be released, so it would only have been a matter of a few days before the news was officially scheduled to go public. Consequently, it is difficult to understand why Office Depot’s first reaction was to promptly delete the on-line announcement posted on their investor relations website before confirming its content just a little later: does this feel thought through and very professional?

Some might argue that a little drama around the announcement may add to the prominence of the news on the financial markets, but the sad reality is that there was not much to get excited about. A quick read through the announcement reveals the very generic nature of its content : apart from the usual verbiage about this being a “merger of equals”, there is no sign of a clearly articulated “reason why” the combined business will do better than if Office Depot and OfficeMax were to continue their own separate ways.

Out of the eight key strategic benefits mentioned in the announcement to justify the merger, the only one which is directly attributable to the merger is the expected synergy of USD 400-600 million in operating and G&A costs which the combined entity hope to achieve by the end of 2016. There is no mention of what the likely integration and rationalization costs will be in the meantime.

Neil Austrian states that “combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value”. How many people today still believe that “bigger” is necessarily “better”? In what way does the merger result in a more attractive partner to the vendors or offer new opportunities to the group’s employees (presumably excluding those made redundant as part of the cost synergies). Does it really take a merger to implement “best practices in sales, operations and management”, or will the post-merger integration effort be a huge distraction which will, to the contrary, hinder the roll-out of these much needed best practices?

Combining Office Depot and OfficeMax will provide the merged entity with approximately 2,000 outlets in the United States, slightly more than rival Staples’ 1,900, but as Christopher Matthews astutely remarks in TIME, “office supply superstores have been struggling to stave off competition from online retailers, while also dealing with the slow decline of paper products as offices become increasingly digitized”. In that context, one fails to understand how owning a greater number of outlets could possibly give the merged company a decisive competitive advantage.

A clearly articulated and irresistible business case is one of the fundamental prerequisites of any business transformation initiative, as anyone experienced in driving change in organizations will know. In the absence of such clarity, the post-merger integration of Office Depot and OfficeMax is most likely to abort.

Until the management of Office Depot and OfficeMax come up with some more compelling and credible arguments as to why they should merge, the market appears to have given the current merger proposal the verdict it deserves, with Office Depot’s shares dropping by more than 16% and OfficeMax by 7% whilst rival Staples enjoyed an upward blip. Clearly, some of the major shareholders cannot be very happy right now…

We learnt in last week’s announcement that “the parties have also agreed to form a selection committee made up of an equal number of independent Board members from each company that will oversee the search process for naming the CEO for the combined company”. Who knows : maybe this search process will unearth some remarkable candidates capable of creating value and growing Office Depot and OfficeMax in more innovative and effective ways than through the proposed ill-conceived merger.

Tag Archives: communication

Does $ 1.1 bn buy you “coolness”

The colour purple – will it run in the wash ?

Solid business case or act of faith ?

Office Depot and OfficeMax Merger Communication Blunder : Poor Timing or Lack of Content?