The worst trades in history… Yahoo spurns Google

In January 1994 Stanford students Jerry Yang and David Filo created “Jerry and David’s guide to the World Wide Web”, which was renamed “Yahoo!” a few months later. A year after that, they incorporated the venture as a company to get funding and floated it on Nasdaq on 12 April 1996. Its share price rose from the initial offering price of $13 to $33 in one day. Soon, it would expand the range of services that it offered to include email, games, travel, weather, maps and an online magazine.

What was the investment?

In 1997 Yahoo was offered the opportunity to license a search technology developed by Sergey Brin and Larry Page for $1m. Not only did Yahoo decline the offer, it also suggested Brin and Page start their own company. Filo introduced them to venture capitalist Michael Moritz of Sequoia Capital, who would become their first major investor. Five years later Yahoo would attempt to buy the company, now called Google, but the deal fell through because Yahoo was only willing to pay $3bn, rather than the $5bn that Page and Brin were demanding.

What happened next?

In January 2000, at the peak of the dotcom boom, Yahoo’s market capitalisation would peak at $125bn. The popping of the technology bubble caused its value to plummet by 95% at one point. Its shares did recover, but Google’s success in displacing Yahoo as the main search engine, as well as the shift in advertising from banner advertisements to search engines, gave it a rocket boost – the market cap of Google

(whose parent company is now known as Alphabet) soared to $24bn by the time it floated in 2004, and to $1.7trn at the time of writing. In contrast, by the time its core internet business was sold in 2016, Yahoo was worth just $36bn.

Lessons for investors

The technology industry changes at an incredibly fast pace, so acquisition of potential competitors can play an important role in protecting profits. Turning down the opportunity to buy Google wasn’t the only mistake Yahoo made – its attempt to buy Facebook (now worth $819bn) in 2006 fell through when it refused to increase the initial bid of $1bn by another $100m. Ironically, many of the acquisitions Yahoo did make were disastrous – it bought Broadcast.com in April 1999 for $5.7bn, for example, only to shut down its services three years later.