I've been slow to get around to commenting on the Huffington Post/AOL acquisition, because I've been laid low with whatever supercold has been running around Washington like a greased pig on uncut crystal meth. On the other hand, that's given me time to digest the positive and the negative reviews, and to ruminate a bit about the deal.
As I do, I can't help thinking about another deal a decade ago: the AOL/Time Warner merger. I was in business school when it happened, in the middle of recruiting season. Since just about every bank and consulting firm in the country had a piece of that deal one way or another, naturally every student had to have a "take" on the deal for interviews. Just as naturally, all those takes were positive.
As I've described before, Austan Goolsbee (now the head of the CEA) spent a class getting us to describe all the reasons that the deal was a good idea--and then systematically demolishing
all of our rationalizations. Mergers are not a good idea merely because one company has an asset the other company can use (in the case of the AOL/Time Warner deal, the idea was that AOL's content and Time Warner's delivery mechanism were two great tastes that taste great together.) AOL had a perfectly good way to get access to Time Warner's cable network: the companies could contract to share space. When you buy a company, the price the owners will want you to pay is going to be at least as much money as they could make by holding onto the stock, so there's no way to generate profits by buying some company simply because it has assets you want to use. In order for the merger to make sense, there has to be something that you can't do as a separate firm, but can do together.
And that thing has to be pretty profitable in order to make up for the costs of the merger. Acquiring firms usually pay a premium for the companies they buy, which means that the new entity needs to exceed the combined profits of the old just to break even. Beyond that, mergers are extremely costly to the organization. Integrating redundant departments takes up enormous managerial time, involves most of the company in vicious internicene battles to protect their turf, and often involves sacking some of your most talented people simply because there's an equally talented person already doing their job. Unless it's a really hands-off acquisition--in which case, why bother?--the conflict between corporate culture often saps morale.
It turned out that Goolsbee was right; the merger was a disaster, destroying hundreds of billions of value
for shareholders. It was actually a good idea for AOL shareholders, who exchanged overpriced bubble-era stock for a half interest in an actually valuable cable network. But the merged entity was a miserable failure as a company. Post-bubble, AOL's profitability and prospects declined, and the firm was forced to take a $99 billion goodwill write-off
, a new record at the time. After years of flailing, AOL was finally spun-off in 2009. It continues to engage in a frantic hunt for new revenue sources to replace its declining portal business, where 80% of the revenue reportedly comes from people who have broadband and don't realize that they can cancel their subscription and still keep their AOL email address.
So what about AOL/HuffPo? Is this time different? Let's walk through the core arguments in favor:
- AOL gets access to Huffington Post's revenue
- Huffington Post gets access to AOL's (declining, but still large) portal traffic
- Huffington Post gets access to the resources of a public company--stock options for employees, future merger capability, and so forth
- Synergy! Content can be syndicated company wide, video production capability can be shared,
- AOL gets access to HuffPo's demonstrated expertise in maximizing traffic.
The first argument makes very little sense to me. AOL is paying--handsomely!--for that revenue. And this time it's not paying in overpriced stock, but in cash, about a third of the liquid assets on the balance sheet
. Moreover, ultimately AOL needs to be interested in profit, and not revenue, and while HuffPo says it turned its first profit this year, I can't find any indication of how big that profit is
relative to HuffPo's $30 million in 2010 revenue, or how much it is going to cost to generate the the rapid revenue growth it is promising for the future. 5X forward earnings--about where the deal is reportedly priced--is a great deal if you're buying Google, and a terrible deal if you're buying Webvan. With a profit, HuffPo is no Webvan, obviously . . . but I'm not convinced its any Google, either.
Unless AOL can actually bring something to the party that makes HuffPo more profitable than it otherwise would be, then my best guess is that the company just traded its cash--at par, or slightly over--for a company worth about what it paid. This does nothing for its shareholders, who would have been better off if the company had just handed out that cash in a dividend. Nor will it save the jobs of employees who are working in the declining part of the business. Presumably, those people could apply to work at Huffington Post if they wanted a job there.
I don't find the second argument much more compelling. Lots of companies already have access to AOL's portal traffic. If AOL uses its portal to divert traffic to HuffPo from other sources, then it may boost HuffPo's traffic, but only at some cost to AOL. Such a move risks lost revenue from foregone partnerships, or degrading the experience of the AOL portal, which may hasten the decline of its core business.
I know what you're thinking--what if AOL users won't notice, there are no lucrative partner deals out there, and it's all gravy? Well, then, AOL and HuffPo can reap exactly the same benefits without the costs of an acquisition by striking a lucrative partnership deal. In some cases, there may be barriers to doing such a deal, such as monitoring costs or co-specialized assets
. But these aren't true of an AOL/HuffPo partnership; content sharing is pretty technically simple, and monitoring is pretty easy on both sides.
I'm just sort of meh on the argument that this provides HuffPo access to the benefits of being a public company. It's true that regulatory changes like Sarbanes-Oxley have raised the minimum corporate size at which it makes sense to go public, and in that sense, there may be economies of scale to be reaped by joining a firm that's already public. On the other hand, AOL's employees don't seem to be all that happy even with the possibility of stock options, and as for fill-in acquisitions, I'd like to see evidence that the current acquisitions are producing synergies before I get excited about buying more companies with AOL's dwindling cash base.
As for those synergies, again, I'm skeptical. As I say, content can be syndicated whether the companies merge or not by striking a deal for preferential partnership. Such a deal not only has much lower upfront costs, but also much lower exit costs if the deal turns out to be a bad idea. Similarly, web video facilities are readily hired on a contract basis if you are seeking economies of scale. But their scalability is somewhat limited; ultimately, you need hours of highly skilled labor no matter how advanced your equipment or speedy your rendering.
Of all the arguments, I find the last most compelling. Huffington Post has a demonstrated ability to grow traffic, and clearly understands the business of web news better than AOL. (After looking at their leaked web strategy deck
, I suspect that my grandmother, who has never seen the internet, understands the business of web news better than AOL.)
However, there are some caveats. Adam Hartung writes at Forbes that it looks like AOL will be in the driver's seat
, which would be bad news if true. Will HuffPo be able to maintain momentum as part of an unsuccessful, unfocused web conglomerate? What will this do to both parties' brands?
The bigger question is how valuable Huffington Post's model will continue to be. It's no secret that the site's success stems in large part from cheap/free content generated by writers looking for publicity, or an entree to future writing careers, and traffic driven by this sort of thing
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Huffington Post is the media's premier operator at Search Engine Optimization (SEO). As Farhad Manjoo writes in the story from which I lifted that string, SEO may not work forever:
Not all SEO is bad, and not all HuffPo articles employ shady SEO, but some of the tricks that HuffPo uses to gin up search traffic are pretty sketchy. These tricks include: stuffing articles with strings of meaningless keywords (HuffPo does this on every piece), repeating potential search queries at the top of a story, and carefully engineering articles in response to rising search terms. These tactics exploit obvious weaknesses in Google and other search engines. If Google's mission is to provide search results that you--a human being--find useful, then HuffPo's keyword-glutted pieces don't belong, because no human being considers a list of synonyms an interesting way to start an article.
But Google's weaknesses aren't permanent. Search engines' algorithms are getting better at detecting keyword gaming, they're beginning to learn searchers' preferences, and they're using social-networking signals to figure out what you, personally, might consider a good or bad article. The other problem for the new AOL-HuffPo is the rise of social networks as a replacement for search engines. Did you go to Google to search for a story about the Huffington Post's purchase, or did you see the news on Facebook or Twitter? Those social networking links are becoming a bigger share of every news site's traffic; as one of my Slate colleagues pointed out, in the Twitter age, "optimizing for Google results is a little like going out and buying the best VCR on the market."
Of course, maybe Huffington Post will get better too; Manjoo notes that this is a long-running battle between search engines and content providers. But even if there remain weaknesses to exploit, it's not clear that Huffington Post will be best positioned to exploit them. Other media companies are getting serious about SEO, as you'll see if you check the metadata to this post. Meanwhile, downmarket "content farms"--essentially spam--are getting better and better at pushing themselves to the top of the search results. And they do it even more cheaply than HuffPo.
Ultimately, I think those content farms may be the death of HuffPo's main competitive advantage. Either Google will get much better at filtering out the spam, or people will start looking for other ways to get information, because for more and more searches, SEO is making Google useless
. They'll go to websites like Consumer Reports or Amazon to get information on appliances, and get more news and information through Facebook and Twitter. That doesn't mean that HuffPo can't survive and thrive, of course. But it seems likely to me that sometime in the next few years, its business model will require a total overhaul. AOL's track record does not make me confident that it can provide the management support, or expertise, to deliver that overhaul.
I don't want to oversell the case against this deal--it's not necessarily the train wreck that AOL/Time Warner was. But if I had to guess, I'd say that the odds that the deal will generate significant value for anyone except the Huffington Post investors and insiders who are cashing out is probably pretty small. The chances that it will create no long-term value, or even destroy it, seems much higher.
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is a columnist at Bloomberg View
and a former senior editor at The Atlantic.
Her new book is The Up Side of Down