When big companies such as Yahoo acquire small companies like Delicious or Flickr they usually do so with the best of intentions but almost always seem to end up messing it all up. The world of Web 2.0 has seen more than their fair share of these situations. Think News Corp's acquisition of MySpace. Or how about Google's acquisition of Dodgeball. There's AOL's purchase of Bebo. And of course Yahoo with their purchases of Flickr, Delicious and others. Some really cool web properties with passionate users and bright futures end up either shut down or marginalized. What gives?

Having worked for both really large (tens of thousands of employees) and really small (started with less than thirty employees) technology companies I feel that I can offer some insights. At a very basic level it usually comes down to the right hand at the big acquiring company not knowing what the left hand is doing. A group of people sit in an office and talk about all the reasons that a deal to purchase company XYZ is a good one. They come to the conclusion that it should happen, and they have the power and the resources to close the deal. The problem is that there are usually other very similar groups of people in the other areas of the company that have different ideas and strategies in mind. The two groups don't really start talking til the deal is done and the whole company knows about it. 

All of the promises (beyond money) of the approach to the acquisition that were made to the acquired firm go straight out the window as the internal forces of the big company struggle to figure out how to fit the new acquisition into the overall strategy, which wasn't properly considered prior to the acquisition. While the acquired company is trying to adjust a battle rages at the levels above them in the organization, and that means a few things will also happen.

1. Immediate plans following the acquisition are put on hold;
2. The morale of the acquired team founders;
3. The performance of the acquired team is degraded;
4. The associated service gradually moves from industry leader to laggard;
5. The deal starts to look like a bust so the acquired firm is then shut down, integrated into other areas of the business or sold.

What fun!

I'm not sure that there's any way to prevent such things from happening again, and frequently, in the future. The reason is that most of the companies that end up in these situations are funded by venture capital. So the decision to sell is typically in the hands of a board dominated by investors keen on exiting quick with a nice return on their investments. I can't say I blame them. On the other side of the equation you have companies whose arteries of innovation are pumping sludge. So the only way they feel like they can innovate is by purchasing innovators and mixing them with the sludge to loosen things up. It usually doesn't work.

There are a lot more losers than winners in these scenarios. The venture investors and company founders are typically net winners in these situations. The VCs get their ROI so they're happy. The company founders lose control of their companies completely but they usually also gain enough money and prestige from the acquisition that they get to go and do whatever they want. The acquiring companies are typically losers because they sink millions of dollars into non-performing assets. The rank-and-file employees of the acquired firms are losers to. They may get something as a result of the acquisition (a stay-on bonus and/or compensation for stock options) but it's nowhere near what the VCs or founders get. So they need to soldier on as employees with new, uninspiring bosses. Finally the customers of the acquired firms suffer.

I've experienced some of the acquisitions mentioned in this post from the perspective of the customer. You think, "Great, the service will improve since Large Co. has lots of resources to put into the business." Unfortunately I haven't seen that happen in most cases. Changes to Delicious were few and far between after the acquisition by Yahoo. Likewise, Flickr (which has survived most of Yahoo's cuts) has moved slowly to update their platform. Consider that their answer to the overwhelming desire of their members to store and share video lead to an option that limits video lengths of ninety seconds. Gee thanks. It's pretty obvious that Yahoo just didn't want to put the effort into doing better for their loyal (and many paying) customers. In some cases companies (like Facebook with their recent acquisition of Drop.io) just shut the service down. Which leads me to the bottom line.

If you're an individual or a business user of web based services you just can't completely count on them. You need to have a backup plan, and perhaps even a backup service that you use so if one gets purchased you have the option to move to a new platform quickly if necessary. That's all you can do really. If you're running one of these small, hot internet companies you should think about this too. If you grow on your own you face great risks. Those risks continue even after you've taken venture money. Will you feel good if you cash out but your customers and employees end up out of luck? I wouldn't blame you if you did because you probably risked a lot and did without to get to that point. Still, there is a longer view to be considered. And it seems to be very difficult to find a second winning idea in this environment. If you're an employee remember that you're just a cog in a machine that will change significantly once acquired. All the promises are just promises destined to be broken. Perhaps you might want to be the naysayer when your company founder asks you what you think of a proposed acquisition.