Is Yahoo approaching its final yodel?
The tech company is reportedly in talks to spin off its core business, as well as whether to finally divest its remaining stake in Chinese e-commerce company Alibaba, the latter fabulously lucrative, the former … well, not so much.
The lion’s share of the blame for what ad industry analyst Brian Wieser called a state of “seemingly permanent decline” in a note to investors this week is falling on its once celebrated CEO, Marissa Mayer.
Mayer arrived with much fanfare from Google with plans to restart the ailing tech company. Google’s 20th employee and a self-described “geek”, Mayer promised a “renewed focus on product innovation to drive user experience and advertising revenue”. But critics charge Mayer has failed to pick a direction in the three years since her elevation.
Shares are hovering around $35 this week after a spike on news of the potential sale of Yahoo’s assets, more than double the price when she started. But all that value is tied up in assets now potentially up for sale, and Yahoo’s still huge original core business remains deeply troubled.
“Unfortunately, I think the market only responds to big game-shifting changes,” said one executive at a leading online video firm. “AOL has done a good job of just calling it what it is: ‘We’re an ad tech company, and we’re going to go lowbrow.’ [Yahoo] haven’t made the really hard decisions.”
Yahoo declined to comment for this story.
Mayer rose to leadership on a wave of approbation in 2012 when she was named CEO – a move that surprised analysts, who had expected interim CEO Ross Levinsohn to be formalized in the role. The move got activist investor Daniel Loeb, who had enthusiastically backed Mayer (and campaigned for the exit of the company’s last CEO, the tough-talking Carol Bartz) for a seat on the board.
Some 17 months later, its stock at $33 a share – up from about $13.50 when Loeb’s fund Third Point had begun buying them – Yahoo saw Third Point dump its stake, earning Loeb and his investors about $1bn. Investor and reporter William Cohan wrote in Bloomberg at the time that “saber-rattling by certain activist hedge-fund managers is designed to benefit them, not the companies they target or their customers”.
The stock continued to rise until Alibaba, which Yahoo had part-owned for a decade, went public. Yahoo took an enormous payday (and a share boost to match) but the move exposed Yahoo’s financial position when it became clear after a few weeks that investors preferred to buy directly into Alibaba than by proxy through their Yahoo shares – which they began to sell en masse.
For Yahoo, 2015 has been a rough year: it has reliably underperformed on shareholder earnings, and reported operational losses in its most recent quarter. Put plainly, Yahoo is trying to buy revenue by making bets on acquisitions and pricey initiatives in every direction, and they’re not paying off.
Consider a small one: Yahoo’s purchase of NBC sitcom Community, a project that gestated during the brief period when Yahoo, AOL and other primarily digital businesses were competing to see who could produce video series on a par with Netflix.
Yahoo bragged that it would not cut the budget from the critically beloved, low-rated sitcom, and the show’s sixth season premiered in March essentially only through desktop browsers; there was no way to download episodes on to mobile devices, no way to stream on to a living-room TV set (unless you owned an Xbox) and, nine months and counting later, still no plans announced to release the show in the US on any other form of media (UK fans can buy a DVD).
The result: Yahoo took a $42m writedown on its three video projects (Community being the largest) despite so much integrated advertising that Community showrunner Dan Harmon joked that “the entire sixth season takes place in a Honda”.
Then there were the bigger acquisitions:
- $1.1bn for Tumblr, which by the time the deal closed had a scant $16.6m in cash and securities. David Karp, the photo-friendly blogging service’s founder, received a direct payout of more than five times the company’s stated assets independent of both his coming salary at Yahoo and his stake in the company, estimated at $250m.
- A five-year agreement in December 2014 to become the default search engine on Mozilla Firefox after Google declined to renew its option; user share of Firefox has shrunk steadily since February.
- The 2014 purchase of video advertising network Brightroll for $640m; that company had about $310m in cash and amortizable assets such as contracts with its customers.
Now Mayer appears to have problems of her own with activist investors. Starboard Value, a $3bn activist hedge fund that has helped to drive deals as sizable as this year’s $6.3bn purchase of Office Depot by Staples, sent a scathing letter to Mayer and Maynard J Webb, Yahoo board chair, in November.
“Despite our numerous conversations and meetings, and notwithstanding your willingness to provide us an audience, you have been reluctant to respond or adapt to the realities of the current environment,” wrote managing member Jeffrey C Smith, saying that spinning off the Alibaba stake would hurt investors.
“Irrespective of the impending tax-free spin-off,” wrote Smith, “it is clear the market has a dim view of the company’s current strategy.”
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