When news broke that Yahoo would be acquiring social media site Tumblr, many eyebrows were raised at the $1.1 billion purchase. However, Yahoo’s chief financial officer Ken Goldman assured the public as well as investors that the price tag was a result of numerous valuations and extensive analysis. To determine how much of an investment Yahoo would take on the social site, Goldman explained that the company studied projected earnings and took inflation, depreciation, taxes, and many other fathers of growth and decline into account.
Ken Goldman and his financial team at Yahoo used previous merger and acquisition transactions to set the example. For instance, Facebook’s purchase of Instagram for $1 billion was a serious case study as Yahoo eyed Tumblr as well as Google’s acquisition of YouTube in 2006. With an effective cash balance over $6 billion, Goldman stands firm behind Yahoo’s purchase of the blogging site.
What CFOs Can Learn from Yahoo’s Acquisition
While CFOs are in charge of day-to-day financial matters and many other considerations, they also guide their companies through complicated mergers and acquisitions. Because such major deals are not normal events, CFOs need to be strategic about mergers and acquisitions. Furthermore, they must also ensure that the price is right for the company. There’s typically a massive void between the bid the buying company is willing to offer and the asking price.
However, before even considering the asking price, CFOs must first begin examining the potential returns. Ask basic questions concerning the company’s history, financial health, growth potential, and whether or not it meshes with the missions and goals of your company. Long-term considerations must also include balance sheets, cash-flow statements, future income projections, and other indicators of a business’s health.
The biggest lesson that Yahoo provides is that CFOs who look to the future often focus on acquisitions and mergers. When analyzing Yahoo’s situation, it’s important to remember their position as a company seeking to rebound and redefine itself. This acquisition of Tumblr is part of a larger effort to help Yahoo move forward from its recent struggles. Likewise, CFOs must always drive the intrinsic value of their firm by focusing on and improving future cash flow.