Why Carousell’s acquisitions make sense

Dear readers,

I came across a great article that talks about why most online advertising is a waste of money. (It’s a long and somewhat boisterous read – you’ve been warned.)

One important takeaway is this: It’s hard to track if your advertising budget is well-spent. In fact, the industry may be built around the flawed practice of marketing to people who are already going to buy your goods. If that’s the case, why bother?

There’s plenty to debate here, but I’ll get straight to my point. In my opinion, the nature of advertising explains why the US$850 million classifieds player Carousell has been busy snapping up peers across Southeast Asia.

Siu Rui Quek, co-founder and Group CEO of Carousell / Photo credit: Handout

Before I go on, we recently unpacked its financial numbers for 2019 here, so do take a look at that.

Anyway, Carousell could’ve gone at it alone, allocating budget towards advertising its regional businesses.

But that might be a waste of money as it’s difficult to dislodge competing brands or sites that are well-established among their users. There’s also diminishing returns in trying to promote a brand as well known as Carousell.

Rather than reaching a marketing stalemate, Carousell probably thought that all things considered, it would be more cost-effective to buy properties that have built a significant user base. And it probably did so much more cheaply last year compared to if it tried now.

All of this is valued in Carousell’s balance sheet – it tacked on US$302 million in intangible assets as a result of the acquisitions.

Whether this amount is justified is subjective, though the important thing is that the buyouts certainly don’t involve forking out upfront cash, though it will entail integrating the teams and shareholders, leading to operational costs.

Advertising, ironically, is most effective for those who don’t really need it. If a business is seeing organic growth and strong retention, advertising could supercharge it. On the other hand, no amount of marketing can save a fundamentally weak business.

Our next two stories could offer up some lessons here.

We looked at the history of Singtel’s successes and failures in reinventing itself, and among its shuttered services include consumer apps that competed against Netflix, Amazon, and other global giants with tremendous built-in advantages. Prying consumer wallets away from them will be a tall order – even for Singtel, a US$36 billion giant.