Watch CBSN Live

Why Yahoo!'s Cozy Ad Publishing Deal May Be Its Worst Yet

Yahoo! (YHOO)'s acquisition of online ad seller 5to1 (FTOH) isn't the biggest deal the search giant has ever done, but it may just be the worst. Yahoo paid $28 million for a company that had revenues of only about $1 million last year, and made a loss of $8.8 million.

5to1's CEO, of course, made out like a bandit. James Heckman came aboard only in November and his employment agreement says that the 4,351,601 shares he was granted at the time will now vest immediately. They were worth about $4.3 million at the time the deal was announced.

There are so many aspects of this deal that stink, it's difficult to know where to begin. Let's start with the comical economics before moving on to the sweetheart nature of the pact. Here's how 5to1 performed last year:

  • Revenues: $1 million
  • Cost of Revenues: $839,082
  • Operating Expenses: $7 million
  • Net loss: $8.9 million
5to1 reported an accumulated deficit of $16.2 million by Q1 2011. Naturally, the company warned it was not a going concern and would need new cash before 2012. Sure, its revenues were growing -- but its costs to generate those revenues were growing equally fast. There was no sign, on the numbers alone, that 5to1 could suddenly start enjoying the advantages of getting bigger.

Paying to lose money
In what way was a loss of $9 million on revenues of $1 million worth $28 million? Yahoo said, "The acquisition of 5to1 will enable Yahoo! to build upon its publisher partnerships and expand its premium inventory," but did not offer specifics.

Strategically, the business was a fragile one. It managed the unsold ad inventory of premium publishers, trying to get top dollar for inventory that the publishers couldn't sell themselves. Does selling something in which market has already expressed its lack of interest sound like a business model to you? 5to1 had 19 employees and its largest customer was 24 percent of sales. Your local deli probably has better economics than that.

It would have been easier and cheaper for Yahoo to simply call all 5to1's clients and say, "Hey, whatever they're doing, we'll do it for 5 percent less." Or to wait until 5to1 ran out of money. That's one of the reasons that FTOH was trading below $1 on the pink sheets.

We must stop meeting like this
So why would Yahoo CEO Carol Bartz want any part of this, knowing that Heckman's $435,000 salary on its own was more than 40 percent of the company's revenues? By an amazing coincidence, it turns out that everyone involved seems to know each other. Dow Jones reported:

The acquisition will reunite 5to1's founders, Chief Executive James Heckman and Ross Levinsohn, who runs Yahoo's operations in the Americas. Both men previously worked at Fox Interactive Media, a News Corp. (NWS) unit.
Paid Content added:
James Heckman ... sold another company he founded -- -- to Yahoo for $100 million four years ago.
Best of all, 5to1's management was stocked with executives (Heckman and four board directors) who did such a good job when they were in charge of MySpace at News Corp. It's a small, expensive world!


Image by Flickr users aresauburn and Miami Workers Center, CC.
View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.