Google rips apart Babylon's merger

Shmulik Shelach

Babylon is now paying the price of its strategy of rapid growth, high profit margins, but few customers.

It was clear to Noam Lanir, the controlling shareholder in Babylon Ltd. (TASE:BBYL), until recently the largest source of users to Google Inc. (Nasdaq: GOOG), why Yahoo! Inc. (YHOO) hired Henrique de Castro as COO from Google, and why it paid him so handsomely. During his years at Google, de Castro learned how money moves around the Internet; who pays whom for what, and how one of the most complicated value chains in the modern business world works.

de Castro's expertise is in the creation of ties with commercial partners for online advertising, and reaching suitable understandings with them, so Lanir could sleep comfortably over the contacts with Yahoo, even when it was learned three weeks ago that Yahoo warned Babylon about the continuation of their relationship.

Indeed, relations with Yahoo quickly calmed down. Babylon, which receives most of its revenue from directing users to the websites of Internet giants and ad revenue sharing with them, should not review its strategy because of Yahoo's threats, simply because Yahoo has few alternatives.

Google, however, is another story. Google's announcement that it would not renew its agreement with Babylon came just as the latter's merger with ironSource Ltd. was about to go ahead. Although Google's announcement was expected, there are various interpretations about the timing. Was this a simple act of revenge against Babylon, which switched to improve the performance of rival Yahoo, or a sophisticated attempt to sabotage the pending merger, which would have created a strong company that could compete in the mobile sector through ironSource? If Google sought to hinder the merger, it succeeded.

From the moment that questions about Babylon's relations with Google and Yahoo arose, questions emerged about the ironSource merger. Babylon's revenue, profits, and value are directly derived from the quality of its relations with these companies. Lanir turned Babylon into a pipeline that delivers cash with almost no effort, but the wild card in this equation are the customers.

Babylon's traditional businesses, which included the sale of translation software to end users, were slow and had low profit margins, but they targeted an endless number of customers. The variables of sales traffic to the Internet giants were the opposite: rapid growth, high profit margins, but few customers.

Babylon is now paying the price of this strategy. One large customer destroyed, either deliberately or as collateral damage, Babylon's planned growth path. Obviously, the merger can still go ahead, but at far worse terms for Babylon's shareholders. Whatever happens next, Babylon's new CEO will have to work hard to meet expectations.

Published by Globes [online], Israel business news - - on November 11, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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