Separating the Fads from the Facts

Posted by on May 10th, 2012

In the relatively new market of app developers Zynga seems to be the top dog. It is using its capital to become more independent from Facebook in terms of income and users in order to  satisfy its shareholders’ demands for growth in the hot markets of both mobile and social platforms. But has its aggressive growth strategy of either acquiring or “copying” every game that hits number one on the mobile charts been the best way to achieve value for shareholders?

Since Zynga acquired OMGPOP, the makers of Draw Something, for $200 million, its number of active users dropped from 15 million to 10 million. The loss of a third of the company’s users in a little over a month suggests that Zynga may have made a hasty purchase. It may be that the game was merely a fad. “When you buy a company based on one specific success rather than a string of proven titles, you’re setting yourself up for potential disaster.”

So how do you avoid the mistake of buying a fad versus buying a company that can contribute lasting value and growth? While all acquisitions are unique, there is a common thread of timing. Timing is key in any purchase; by using foresight, one company can acquire another for a bargain basement price and profit off the soon to be hype.

A perfect example of a company successfully employing this strategy is Google‘s acquisition of Youtube for $1.65 billion in October 2006. Google had  the foresight to realize that Youtube would be a force to reckon with and it inadvertently blocked its only true threat as a search engine by scooping up what was to become the No. 2 search engine in the world. This not only protected and increased Google’s share in the search market, but opened up a whole new market for the company to exploit in display advertising as YouTube provided billions of additional page views to serve Google search ads on.

Although not every acquisition can be as successful as Google’s,  it serves as a good takeaway that timing is an important factor in all M&A activity. Acquisitions can be a useful strategy for growing and adding value to your company, just make sure the target company has not peaked already. In the end, acquiring a company has huge upside potential if you buy before the hype takes over, just remember to rule out the fads from the facts.