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TMFBreakerRick (80.60)

Let This Be a Lesson to You



June 10, 2010 – Comments (4) | RELATED TICKERS: VIA , YHOO , MSFT

The brain trusts at Facebook, Twitter, Yelp, Foursquare, and the countless more Web 2.0 darlings probably missed yesterday's news about layoffs at Linden Lab. 

Linden Lab, the company that burst onto the scene with its Second Life virtual community, was once the buzz-worthy company that today's hotties have become. It was ahead of its time with graphical avatar-based realms and virtual currency.

 In a sign that Linden dollars are no match to real dinero, the company is laying off 30% of its staff.    

"Profits follow utility," fellow Fool Tim Beyers wrote three years ago, suggesting that a then peaking Second Life needed a larger partner to take it to the next level. "Right now, Second Life doesn't offer enough utility to transform it from a neat time-waster into a cash-producing e-monster."

Second Life lives on, but it seems that all of the social gaming these days is taking place inside Facebook. Surely it must have received some savory buyout proposals in its prime. Why did it let the opportunity get away? 

Pride often gets in the way of acquisition targets. Facebook scoffed at buyout offers from Viacom (NYSE: VIA), Microsoft (Nasdaq: MSFT), and Yahoo! (Nasdaq: YHOO), and it's likely worth substantially more today. Google (Nasdaq: GOOG) was reportedly in talks to acquire Yelp in a $500 million deal that never panned out, and the jury's out as to whether Yelp is worth more or less than that today. Foursquare was a rumored Yahoo! target two months ago.

We don't know who the chumps are because botched negotiations are rarely discussed publicly. It's also hard to place a value on dot-com startups, regardless of what your venture capitalist buddy is telling you.

However, we do know that greed is alive and well among public companies that have come to regret their headshaking ways.

Remember Microsoft's $31 a share buyout bid for Yahoo!? Shares of Yahoo! are trading for less than half of that 2008 exit price. Remember Electronic Arts (Nasdaq: ERTS) offering $26 a stub for Take-Two Interactive (Nasdaq: TTWO) later that year? The Grand Theft Auto company closed in the single digits yesterday.Circuit City turned down acquisitive offers of $8 a share in 2003 and $17 a share two years later. It also didn't jump at Blockbuster's (NYSE: BBI) initial advances in 2008. A few months later, it was liquidating.  

Naturally the darlings believe that they will be the exceptions to the rule. Facebook -- for now -- appears to be exactly that.

However, these blazing speedsters need to learn from the companies that held out for too much, when an exit strategy would have been lucrative and a potential pairing with a seasoned company model-widening. 

Bravado rocks in moderation, but greed -- more often than not -- leads to an early grave.

4 Comments – Post Your Own

#1) On June 10, 2010 at 6:14 PM, cashkid79 (93.73) wrote:

I'm interested to hear about any possible M & A activity or partnerships that The Motley Fool has considered or are in the works.

Of course, I don't expect TMF to disclose these things publicy, but it is an exciting world - the software scene... or the 'Digital Age' if you like ... an exponentially growing phenomenon.

Another interesting topic since we are speaking about greed are companys such as iCopyright; already partnered with the AP news site (and many others) to profit off of the sharing of content to blogs and social networking sites (or anyplace other than where it was originally published) from sites offering news articles and original or protected content - even as most sites DO have a 'Share' feature of some sort, which would seem to encourage the open sharing of content. 

In fact, iCopyright is actually set to be hitting up China of all places to pursue more possible partnerships. I find that interesting for some reason...

I only mention this because greed and partnerships seemed to be the topic here...I would still love to hear thoughts on this seemingly profitable company in particular (400% growth in 2009) and the reasoning behind such technology and what everyone thinks.

To show you what I'm talking about, take a look at this article on Louisiana leaders wanting to resume drilling in the Gulf that came from the AP. After reading (or not) just click on 'save' and see what it tells you. 



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#2) On June 10, 2010 at 6:28 PM, cashkid79 (93.73) wrote:

I do remember reading that Microsoft (MSFT) has private ownership interests in Facebook...

Privately traded shares of Facebook on one illiquid market trading platform shows that it has taken over Yahoo (YHOO) in terms of market capitalization recently. 

Zuckerberg had been quoted saying that he was in 'no hurry' to take Facebook public, following comments in the press months earlier describing him as 'IPO shy'.


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#3) On June 10, 2010 at 6:32 PM, daelra (< 20) wrote:

Financially maybe but just look at all those companies that assimilated into EA, Microsoft, etc. Not only do they tend to get locked into a single format, they often lose a bucket load of originality.

Just how many stories are there out there where the original directors of a small company that got sucked up leave the new one after a couple of years to start all over again?

One of the things I do like about Second Life is that there is (or at least was) very little corporateness about it.

It's only since they've employed corporate people to look after SL, the whole thing has began to unravel.

Not everything revolves around the dollar. I would certainly prefer to be highly regarded and earning a comfortable living producing something unique and fantastic than be some multimillionaire watching my pride and joy degenerate into some grey sludge of a product.

In the case of Second Life, I don't think it could ever be mainstream without losing its soul. Linden Labs is better off catering better for the demographic it already has than trying to break into the mainstream.

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#4) On June 11, 2010 at 3:13 AM, 1315623493 wrote:

Haha, Yahoo! got pwned. Shoulda, woulda, coulda. 

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