More Cuts Are Ahead at Yahoo

by Jonathan Berr | April 4, 2012 1:13 pm

Yahoo (NASDAQ:YHOO[1]) CEO Scott Thompson’s plan to slash about 2,000 employees, or 14% of the Internet media company’s workforce of 14,000, doesn’t go far enough. But it will ratchet up the pressure on AOL (NYSE:AOL[2]) CEO Tim Armstrong, whose rival firm also is struggling, to do the same.

Thompson, who joined Sunnyvale, Calif.-based Yahoo in January after heading eBay’s (NASDAQ:EBAY[3]) PayPal unit, needs to fundamentally restructure the company, which in its present configuration makes no sense. Nothing should be off the table, including selling Web properties and patents. The company also needs to finally unload its 35% stake in Yahoo Japan[4] and its 40% interest[5] in Alibaba.

Shares of Yahoo have flat-lined for years, falling nearly 52% since 2007. In 2008, Yahoo rejected Microsoft’s (NASDAQ:MSFT[6]) unsolicited $44.6 billion offer, arguing at the time that it was too low. It was one of the worst decisions in the history of Corporate America. The market now values Yahoo at about $18.3 billion, and recently about everything that could go wrong has done so, including a potentially costly patent litigation battle with Facebook[7] and a proxy battle with activist investor Third Point.

Kara Swisher of All Things D[8] described the cuts announced today as “‘the tip of the proverbial iceberg that will hit the storied Silicon Valley Internet giant in the months to come.” She added that Yahoo was “doubling down” in some areas and that there would be “simultaneous hiring” in the months ahead.

How this will net out is not clear. Unfortunately, Yahoo looks bloated even with the $375 million in expected savings from the cuts it’s considering.

Yahoo earns $353,489[9] per employee, well below the industry average of $11.54 million. The ratio on a net income basis is $41,542, which lags badly the industry average of $2.16 million. Based on that data, it doesn’t take a psychic to figure that more layoffs are on the horizon.

Like Yahoo, AOL is a vestige of the early days of the Internet when websites tried to be all things to all people by offering a wide variety of services from celebrity news to fantasy sports to stock quotes. As the Internet has evolved, this approach no longer works, a message that Wall Street learned a long time ago.

AOL’s Armstrong, who recently signed a four-year contract[10] guaranteeing him $1 million in salary plus bonuses, is under exactly the same pressures as his counterpart at Yahoo to create shareholder value. Like Yahoo, AOL is facing a nasty proxy fight. Starboard Value LP[11] wants Armstrong to unload assets such as MapQuest and Moviefone. The investor, which recently grumbled[12] about AOL’s decision to delay its annual meeting, is particularly irate about Patch, AOL’s network of more than 800 hyper-local sites, which it argues could lose $150 million this year. Even the once-ubiquitous AIM instant messaging service is withering[13].

Shares of AOL have soared this year more than 21% on expectations that Armstrong might take the company private. To be fair, AOL did post better-than-expected fourth-quarter results, but expectations were ridiculously low. Armstrong will have to do better than brag about having the smallest revenue increase in five years to fend off Starboard.

Even with its recent job cuts, AOL also appears to be bloated[14] generating revenue per employee of $389,064 and net income per worker of just $2,314. Like Yahoo, the question isn’t if massive layoffs are coming but when.

Jonathan Berr is a former AOL contract writer. He doesn’t own shares of the companies listed here.

  1. YHOO:
  2. AOL:
  3. EBAY:
  4. Yahoo Japan:
  5. its 40% interest:
  6. MSFT:
  7. costly patent litigation battle with Facebook:
  8. All Things D:
  9. Yahoo earns $353,489:
  10. a four-year contract:
  11. Starboard Value LP:
  12. , which recently grumbled:
  13. AIM instant messaging service is withering:
  14. appears to be bloated:

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