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It's official: after more than a year of rumors, AOL has finally managed to find a buyer for Bebo, the social networking website it purchased in 2008 for a whopping $850m.

The buyer: financial firm Criterion Capital Partners. The price: word on the street is that it didn't exceed $10m, and may have been as low as $2.5m.

The sale of Bebo marks an end to perhaps one of the most disastrous acquisitions in consumer internet history, and certainly one of the worst in recent memory. As noted by the Irish Independent, the original acquisition price for Bebo included $766m of goodwill. Easy come, easy go. All AOL is left with: a tax write-off of up to $325m.

There was a lot of skepticism about the Bebo purchase when it was announced, and the skeptics have been proven right. But AOL's huge mistake offers up some good lessons for other companies. Here are six of them:

Timing is everything. AOL bought Bebo in 2008, a good four years after the social networking craze began, and nearly three years after MySpace was purchased by News Corp. for $580m. At the time, there had already been plenty of talk about a Web 2.0 bubble, and there were larger concerns about the economy (and recession) in the United States. AOL apparently didn't take any of this into consideration.

9-10 figures is a lot of money. $850m -- almost a billion dollars -- is not chump change. Enough said.

You can't go wrong paying for revenue, you can go wrong paying for future revenue. Most acquisitions aren't as sexy as AOL's bold Bebo buy. A big reason: AOL paid a lot of money for a company with relatively little revenue. In 2007, Bebo reportedly produced a modest $20m in revenue and $5m in EBITDA. In other words, AOL paid nearly 43 times revenue and 160 times EBIDTA to buy the social network. Apparently it believed it could "supercharge" Bebo's revenue. Paying a such a hefty premium when it believed it would create the bulk of Bebo's future revenue was just downright insane.

Top dollar is for the top dog. When AOL acquired Bebo, it was the third largest social network in AOL's key market, the United States. But paying top dollar to be at the bottom of the top three is perhaps the worst of both worlds. After all, if you're willing to pay top dollar, there are good reasons why you should pursue the best of the best, not 'one of the best.' If the best of the best can't be had, there's usually far more to be said for spending less for a smaller player that hasn't realized its growth potential. 

Give a lot of weight to the founders. AOL knew that Bebo's founders, Michael and Xochi Birch, would probably not remain at Bebo long-term after collecting their jackpot of several hundred million dollars. Yet that apparently didn't bother AOL. It should have. Although it's commonplace for founders to leave after a big acquisition for obvious reasons, it's not necessarily desirable and is sometimes a reflection that the founders think the best days are behind their creation. A counter-example to this: YouTube's founders Chad Hurley and Steve Chen are still with YouTube/Google despite walking away with more than $600m in Google stock collectively. YouTube, of course, has done quite well since Google acquired it and there's a good argument to be made that Hurley and Chen's continued involvement is a big reason why.

Don't ignore risk. At the end of the day, AOL's botched acquisition of Bebo is clearly the result of poor risk management. The timing was bad, the company purchased wasn't the one to buy, and the price wasn't right. Because of all this, the odds of success were stacked against AOL from the very beginning. But AOL, perhaps eager to recapture its past glory by jumping head first into the social networking craze, didn't do the math. If it did, it would have realized the unnecessary risk it was taking on.

Patricio Robles

Published 18 June, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (1)

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Jeff Ogden

Very nice post and quite interesting. It could be summed up with the simple mantra "Don't be stupid."

Overpaying for phantom future revenues was stupid.

Bad timing was stupid.

Overpaying was stupid.

Thanks for sharing.

Jeff Ogden, the Fearless Competitor
President, Find New Customers "Lead Generation Made Simple"
http://www.findnewcustomers.net

about 6 years ago

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