Why Internet companies are attractive takeover targets: They can't manage

Are Internet companies so inefficient and clueless about management that have to be acquired?Lost in the commentary about Bernstein's "U.
Written by Larry Dignan, Contributor

Are Internet companies so inefficient and clueless about management that have to be acquired?

Lost in the commentary about Bernstein's "U.S. Internet -- The End of the Beginning" report, which concluded that Amazon and Google would be the dominant Internet duopoly, are the reasons why today's leading Web players will be gobbled up. The biggest reason: Internet companies can't manage their way out of a paper bag.

Since I've been spending a little more time on airplanes these days, I've been catching up on some reading. Bernstein analyst Jeffrey Lindsay's 315 page PDF report on the state of the Internet is one of the items on my list.

Are Internet companies really so bad at management? You could make that case. Couple hyper growth with poor product development and you get inefficient in a hurry. Perhaps if Yahoo had its management issues sorted out it wouldn't be in its current proxy war. One way out of this management pickle is to be acquired by companies that are better at delivering returns.

Lindsay notes:

Despite their high-tech patina, four companies in our coverage group use a vertical departmental structure that would be recognizable to Joseph Stalin and most Soviet-era tractor factory managers. Often the structures are called "the Matrix" or "the network," but they are just as stove-piped as any GM or Ford factory of the 1950s. This is why we think most of the players are so bad at product development and have particularly inefficient operations that increase their attractiveness as acquisition targets.

Why is this the case? Managers at Internet companies have been passive because there was a lot of growth. The motto in the Internet's first decade was to not screw it up, stand aside and let the growth come to you. The rub: Growth slows and once that happens managers have to prune business portfolios, outsource and manage headcount. In other words, Internet managers will have to toss underperformers and continually restructure. Lindsay notes that Internet management teams will have to be more "interventionist than their predecessors."

In other words, the grown-ups will buy Internet companies and then manage them better. The big takeaway is that Internet managers will increasingly be compared to counterparts in other industries who "have coaxed strong performance out of much less advantaged assets," said Lindsay. This comparison could be why you see Wall Street veterans like Carl Icahn circling the likes of Yahoo (and Motorola and BEA before that). Icahn is comparing Yahoo CEO Jerry Yang not to other Internet CEOs, but to the bigwigs at General Electric and other Six Sigma types. Is it any wonder that Icahn wants to hire a more experienced CEO when he examines Yang? In many respects, this management point is to be expected in a maturing industry, but an economic downturn is likely to weed out underperforming executives in a hurry.

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