So while companies such as Google have built significant value as result of a well-considered mergers and acquisitions strategy, Yahoo seemed to squander its value. What role did merger-and-acquisition missteps play in Yahoo’s slow death?

There are three major reasons for M&A failure—flawed strategy, misguided valuation, and ineffective integration. And Yahoo is a classic case study in how these three factors can destroy company value.

The first reason for failure is flawed or unclear strategy. The strategic rationale for acquisitions must be soundly based on a company’s clear core competency. Growth opportunities should be centered in areas where a firm has distinct advantages, not on areas of overt weaknesses. Betting that a merger or acquisition will solve a company’s problems is like expecting a marriage to resolve the individual difficulties of two troubled people.

For instance, if a product is unable to obtain distribution by clearly providing value at its core, acquiring distribution will not be a solution. In 1987, during the early days of personal computing, Atari was struggling to convince retailers to sell its PCs. In an attempt to boost distribution, Jack Tramiel, then chairman of Atari, bought the Federated chain of consumer electronics stores. Tramiel reasoned that 65 Federated stores in California, Arizona, Texas, and Kansas would successfully hawk his computers. Using its newly obtained captive distribution, Atari could grant its computer line prime shelf space at Federated. But the Atari/Federated deal soon faltered as customers simply did not want Atari computers. As an old adage goes, “You won’t improve buoyancy by strapping together two leaky canoes.”

How effectively did Yahoo tie M&A activities to a core competency? Unfortunately, over the years of Yahoo’s existence, the company was tentative, if not schizophrenic, about what its core competency actually was. This not only made it difficult to define a clear M&A strategy throughout the company’s history, but also led to disastrous valuation judgments.

Yahoo began as a portal to organize the internet, using hundreds of employees to categorize requests for websites to be added to its directory. Other services such as news, sports, and email were added around the directory. But the sprawling web eventually defied complete classification, and Yahoo’s core started to collapse.

In 1999, Yahoo decided it would focus on becoming a digital media company and purchased Broadcast.com in a $5.7 billion acquisition. While the deal made Broadcast.com founder Mark Cuban wealthy, Yahoo was years too early in moving to digital media and had radically overvalued the transaction.

In 2002, Yahoo decided it would become a search company and attempted to buy an upstart company named Google on the cheap. The companies could not agree on valuation, and the deal collapsed. This time Yahoo was too timid and had dramatically undervalued Google by billions of dollars.

Yahoo was determined to move ahead with search and spent a more modest $2 billion to acquire targets that included Inktomi and Overture. But Yahoo found it tough to compete with Google search algorithms. By 2007, Google’s revenues had easily lapped Yahoo’s.

Not to worry—the second coming of co-founder Jerry Yang was on the horizon. In 2005 Yang had orchestrated a brilliant deal for Yahoo to acquire 40 percent of Alibaba, now regarded by many as the best investment ever made by an American company in China. As Yang returned in 2007, perhaps he could discover a new core for Yahoo.

Although Yang did not make any multi-billion dollar acquisitions, he did turn one down. In 2008, Yang rejected a bid from Microsoft to buy Yahoo for about $45 billion even though the offer reflected a 60 percent premium. Yahoo investors, dismayed at Yang’s reluctance to part with the assets of Yahoo at Microsoft’s offer price, pressured him to step down as CEO.

When Marissa Mayer assumed control of Yahoo in 2012, she decided the company should pursue an aggressive M&A program patterned after what Mayer had learned during her long career at Google.

During Mayer’s tenure at Yahoo, the company spent more than $2 billion acquiring over 50 early-stage ventures. The goal was to achieve what I’ve dubbed “semi-organic growth,” which involves the creative blending of talent and technology of acquired firms with existing acquirer capabilities. While at Google, Mayer had seen the benefits of such a program and was determined to replicate the process at Yahoo.

However, the M&A playbook that worked so well for Google was not destined to thrive at Yahoo. Whereas Google’s hugely profitable digital advertising core provided an ample cushion for acquisitions to be successfully integrated, Yahoo was under turnaround pressure. The company lacked the time and management style necessary for creativity to flourish and new services to thrive. Layoffs were much more common than bonuses. And write-downs of acquisitions became a regular occurrence when Yahoo’s quarterly earnings were reported.

During its 22-year existence as an independent company, Yahoo had not been able to base M&A activities on a core identity, and that cast a pall on many of its major deals. It’s perhaps why there was no Yahoo analog to other companies’ highly successful deals—such as eBay’s purchase of PayPal, Facebook’s acquisition of Instagram, or Google’s purchase of YouTube. Rather, due to unclear acquisition strategy, valuation miscues, and an inability to foster healthy integration, Yahoo will now become just another piece of Verizon’s effort to join Google and Facebook as a digital advertising powerhouse.

Yahoo’s long history as a tech industry pioneer has ended in the graveyard of independent companies.

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Microsoft’s batting average, especially for larger deals, does not qualify it for a spot on the All-Star M&A team. The company has written off multiple billions of dollars in failed acquisitions that include Nokia (smartphones) and aQuantive (digital marketing).

This deal would be the largest in the history of Redmond, Washington-based Microsoft, and skeptics quickly pronounced that large tech deals don’t work, citing such hall-of-shame transactions as AOL/Time Warner and Hewlett-Packard/Compaq, both disasters for the acquiring companies. Given Microsoft’s also-ran M&A record, how could this acquisition of LinkedIn avoid turning into “goodwill garbage?” (Companies take “goodwill” write-downs, i.e. losses, when an M&A transaction fails.)

I teach mergers and acquisitions at UCLA Anderson. And in evaluating this deal, I think it’s important to analyze what it would take for Microsoft to realize more than $26.2 billion of value from LinkedIn.

First, there needs to be a compelling strategic rationale, such as seizing on an opportunity, responding to a market shock, or even attempting to create a new market. Microsoft CEO Satya Nadella articulated the strategic rationale for Microsoft/LinkedIn by stating that work today is split between tools to get jobs done (think Microsoft Office) and professional networks (think LinkedIn). The deal would weave these two pieces together. “It’s really the coming together of the professional cloud and the professional network,” said Nadella in an interview with The Wall Street Journal.

Microsoft CEO Satya Nadella in 2013.

An ideal acquisition has synergies, those magical effects that occur when the new whole is greater than the sum of the individual parts. Nadella is suggesting LinkedIn will trigger productivity/network synergies across a wide range of products, such as Outlook calendar meetings having access to LinkedIn professional data. Or Excel spreadsheet users becoming more adept when informed by LinkedIn/Lynda technical instruction videos. Or Dynamics (Microsoft’s customer relationship software) being enriched by background data on 400 million professionals found in LinkedIn.

Then there are potential synergies on the LinkedIn side. LinkedIn CEO Jeff Weiner said the deal provides “a meaningful acceleration of the scale at which we operate.” Apart from Microsoft’s financial resources, Office alone has a vast reach of some 1.2 billion users, and the prospect of pouring Redmond rocket fuel on LinkedIn’s slowing growth rate is alluring.

So place a checkmark by compelling deal rationale. But more is needed to make a deal succeed.

Secondly, the economics of the deal have to make sense. Will the standalone value of LinkedIn plus the value of all synergies exceed the purchase price of $26.2 billion?

In order to answer this question we need to analyze whether the deal offers opportunities to cut costs, increase revenues, develop and sell new products, and compete in a changing market. These must be evaluated in light of the company’s expected cash flows, and the opportunity costs of tying up the funds for purchase at this time.

With the LinkedIn deal, potential revenue synergy dominates, since little cost cutting is anticipated. Weiner stated in an online post that little is expected to change for LinkedIn employees. Only those whose jobs are entirely focused on maintaining LinkedIn’s status as a publicly traded company were likely to be impacted.

But Wall Street typically considers revenue synergies as more speculative, even if they are as compelling as those described above. They are far less under the control of an acquiring company than cost synergies. And this leads us to a third dimension for acquisition success—where the rubber really hits the road in realizing M&A value.

LinkedIn CEO Jeff Weiner in 2012.

Thirdly, unless the two companies integrate successfully, the premium or even the basic consideration paid for a target can evaporate. Some executives feel that this implies integration efforts must be concluded rapidly, certainly within a year. After all, cash flows associated with an acquisition have time value, so the sooner positive flows are realized, the more valuable they will be.

Academics debate the tradeoffs in the speed of integration. On the one hand, speed is an important consideration, given that more rapid receipt of cash-flow benefits yields higher present value for the acquirer and is likely to yield better stock market performance. In addition, the faster the integration, the more likely the target will be willing to accept changes. But if the integration moves too fast, before the acquiring company really understands the target, mistakes will be made that cost money, not to mention siphon the morale of key talent. All of that drains value from the target company.

For Microsoft’s acquisition of LinkedIn to be successful, the integration strategy must not only establish an appropriate starting point, but—even more important—determine the path to the desired synergy objectives (achieving revenue growth by enabling professionals to work and network in new ways) and the speed on that integration path.

Although rapid assimilation is the correct path for some deals, one size doesn’t fit all. In fact, there are numerous styles for successful integration, some of which require that targets be left alone for a considerable period of time after deal close. This preservation model, which is what Microsoft appears to be adopting for LinkedIn, is building a strong track record, including Google’s acquisition of YouTube or Facebook’s deal with Instagram. Both companies were allowed to maintain independence for a considerable time.

For example, in 2006 when Google acquired YouTube the company retained its brand and all employees, including co-founders Chad Hurley and Steve Chen. Eric Schmidt (Google CEO at the time) personally and proactively defended YouTube’s autonomy. To that end, YouTube maintained its San Bruno, California office location rather than moving to Google company headquarters. There was no significant Google branding visible at YouTube’s offices.

But Microsoft/LinkedIn must go beyond preservation and autonomy. If revenue synergies are to be realized, a symbiotic blend involving a meaningful reciprocal exchange of technology, talent, and capability must occur. And this bidirectional, alchemic form of integration is the most challenging kind of integration to pull off.

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