3 Companies That Should Have Sold Sooner

By Aaron Pragnell | September 12, 2012 AAA

Acquisitions are common business practices. At times, it makes sense for a company to acquire an existing business to help its own growth strategy. The offer generally has a premium over the current market value of the target company, so in many cases it makes sense to accept the offer. However, the target company does not always accept the offer. It may have a different vision as to where it wants the direction of the company to go or even feel the premium offered is not high enough. In some instances, this may result in a hostile takeover if the acquirer feels it needs to gain control over the target company.

Mergers and acquisitions (M&A) are extremely common in the technology sector. As the landscape is rapidly changing, new players are consistently emerging in the sector. This creates the perfect environment for acquisitions. Over the years, some major players have set their sights on startups or other competitors and placed hefty valuations on the potential takeover targets. However, the acquirers have not always been successful and in some cases may have been lucky, as the valuation later dropped far below the offering price. Here are three companies that may have missed the boat on being sold for an optimal price.

Digg
Founded in 2004, Digg helps bring the most talked-about stories on the web into one place for users. The site allows users to vote on what articles they like best or "dig," with the highest voted article making the front page, allowing for more people to view it. The site peaked in 2008, attracting approximately 236 million visitors that year. Also in 2008, Google offered to acquire Digg for around $200 million, but the deal ended up falling through. Although nothing was officially released as to why the deal fell through, rumors circulated that Digg boss and co-founder Kevin Rose declined the offer. Over the next few years, Digg would make a few poor decisions that damaged the company's reputation, including an unpopular site redesign. In one month alone, it was estimated that Digg lost roughly 35% of its users and by 2012, traffic had fallen below 5 million visitors per month.

In July 2012, Digg ended up selling the company in three parts for a total of around $16 million. Washington Post paid about $12 million for the Digg team, LinkedIn (NYSE:LNKD) paid nearly $4 million for Digg patents and Betaworks acquired the remaining assets for an estimated $500,000. Approximately $184 million less than the Google offer four years earlier. However, at the beginning of August, under the guidance of Betaworks, Digg underwent another redesign. Whether or not this will attract the same traffic the site once had remains to be seen.

Groupon
The coupon giant known for daily deals on things to do, see and eat, has grown to a household name since launching in 2008. The service is offered in 44 countries and more than 500 markets. Deals can reach as much as 90% off but average around 56%. Just two years after launching, Google offered to acquire the coupon company for approximately $6 billion. Groupon (Nasdaq:GRPN) decided to reject the offer and remain an independent company, with plans to go public.

In late 2011, Groupon hit the public markets with an IPO price tag of $20. Although the IPO appeared to be successful initially, the valuation was near $13 billion or roughly double the Google offer from one year prior. The stock performance has been nothing but bearish since, showing that the $13 billion IPO valuation was far too high. Since the shares have fallen over 70% to roughly $4.75. Groupon trades today with a market cap of less than $3 billion, half the value of the Google offer in 2010 and about one-fourth the IPO valuation. Some analysts have already begun downgrading the stock to a $3 price target, showing that the business model is not set to rebound anytime soon.

Yahoo!
The company has a long history, dating back to when it was founded 1994 and a successful IPO two years later in the spring of 1996. The company's shares began trading around $24.50 per share and soared to an all-time high near $118 in early 2000. Shares plummeted during the dotcom bubble and have since struggled to break through support near $40.

In 2008, Microsoft offered to buy Yahoo (Nasdaq:YHOO) for $31 per share, a 62% premium over the market value at the time. The acquisition was valued at nearly $45 billion dollars. This move would have helped Microsoft enter the search business. However, Yahoo rejected the offer, feeling that it "substantially undervalued" the firm. Yahoo market share was continuously dropping to rival Google in search and many felt like the board may have had made a poor decision declining the offer.

Today, Yahoo shares trade near $15 and the market cap is around $17 billion. A level far below the Microsoft acquisition offer four years ago. Yahoo has been continuously struggling to create a new business model and recently hired ex-Googler, Marissa Mayer to help turn the company around. Yahoo still has annual revenue near the $5 billion mark and almost $2 billion in cash. However, if it still wants to remain a major player, Yahoo may need to reevaluate its current strategy.

The Bottom Line
Successful companies will continue to receive acquisition offers by larger players in the industry. While it's a positive sign that your company has something highly sought-after, it also leaves shareholders with a tough decision to make. It really boils down to the direction that the company wants to go and if the acquirer will add value to the organization.

Sometimes being acquired too soon can leave one wishing that he or she would have continued as a separate entity, but sometimes the offer is just too large to pass up. It is a difficult decision to make, but in most cases, the best time to sell an organization is unfortunately when everything is running smoothly and profits are rising steadily. This is often when offers will have large premiums over the true market value. As soon as business begins to slow, valuation can quickly plummet, leaving owners to wonder if they made the right decision.

Aaron Pragnell does not own stock in any companies mentioned in this article.

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