by Keith Fitz-Gerald | May 17, 2012 12:45 pm
It’s no wonder Yahoo! (NASDAQ:YHOO) investors are pissed. I would be too if I owned Yahoo – but I don’t. Why not? Maybe it’s the four CEOs in five years, the botched sale to Microsoft (NASDAQ:MSFT) in 2008, or a Chief Executive Officer who can’t be bothered to verify his own credentials in SEC filings.
Or maybe it’s the dysfunctional board of directors and the erosion of massive amounts of shareholder value over the years. Add it all up and you have an unmitigated disaster on your hands.
Activist shareholder Daniel Loeb, who owns 5.8% of the company through his hedge fund, Third Point, LLC, has every right to be angry and vocal about it.
The way I see things, Yahoo is following what I call the Christopher Columbus School of Management: it has no idea where it’s going, has no idea where it’s been and has no idea what to do when it arrives.
Yahoo was ostensibly a search engine in the beginning. The latest outgoing CEO, Scott Thompson, had been trying to rebuild the beleaguered Silicon Valley company into one more reflection of his own strengths in data personalization as opposed to the bloated advertising-driven business it has become.
Whether or not Thompson would have succeeded is now a moot point. Incoming interim CEO Ross Levinsohn has an advertising background. Talk about a conundrum.
Here’s the thing…
Whereas Yahoo was once regarded as one of the foundational bricks in the Internet wall of success, today it’s a pariah struggling to remain relevant at a time when social media, mobile computing and personalized data delivery will ultimately determine its corporate viability…or death.
Advertising-based strategies–especially in Yahoo’s world– are challenging revenue models to say the least. And you can see how big the gap is between where Yahoo stands and where its competitors are if you look at the numbers.
For instance, Yahoo makes about $8 per unique user, whereas Google (NASDAQ:GOOG) generates approximately $24 per unique user and Amazon (NASDAQ:AMZN) takes down a whopping $189 per user, according to Business Insider (as reported in 2011).
Facebook (NASDAQ:FB), in case you’re wondering, generates a mere $1.17 as reported by Bloomberg using data drawn from the company’s most recent S-1 filing.
Still, the board seems to think something’s worth salvaging.
I have my doubts but if I were in Levinsohn’s shoes, here’s what I’d do:
The core advertising model upon which Yahoo was built is dead. The company has to transition into media to survive. Whether or not it can survive the transition is another question entirely.
Yahoo’s been hemming and hawing with Alibaba for too long. This is making investors unhappy and Wall Street uneasy. Quit squandering cash in a market that’s unlikely to pay off. Same for Yahoo Japan. Yahoo believes it’s worth far more than the market thinks and Masayoshi Son of Softbank wants to pay. Chances are Masayoshi is right and Yahoo in its arrogance hasn’t been able to come to terms with being a has-been.
Yahoo has been all over Facebook with patent litigation that potentially ties up the firm for years while requiring tens of millions in additional legal fees. This is going to backfire because Facebook’s counterclaims highlight 10 patents that appear to trump the corresponding Yahoo patents serving as the basis for the dispute. Never mind the cash, just get the distraction off the books and get on with it. Any sort of licensing agreement would be a win. A shakedown attempt, which is really what Yahoo’s lawsuit is, will fail.
Microsoft drives a good portion of Yahoo’s search so it makes sense that the company would want to build up defenses against the likes of Google, Amazon and Facebook. But here, too, be ready to eat a big slice of humble pie. Chances are Team Ballmer is going to lowball you.
As of March 31st, 2012 Yahoo sits on $2.21 billion in cash and only $132 million in debt. It’s arrived in a space where it needs to buy growth absent viable internal possibilities and a busted business model. Some analysts have suggested Twitter or Pinterest as potential targets, but I think both of those would be MySpace-style mistakes. It’s do-or-die time for Yahoo and the better play may be one of integration with the likes of a Hulu or a Netflix (NASDAQ:NFLX). If you can’t bring a deal home, put the company on the block. With the Facebook IPO looming, cash seems to be sloshing around even as the window of opportunity closes.
Whatever Levinsohn does, he better do it quickly. I think Yahoo’s breakup value is only about $10 a share.
And that’s on a good day with the promise of growing numbers that, frankly, I just don’t see on the horizon.
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