Thursday, January 24, 2008

Yahoo Looks Ripe For A Deal

Saturday's Wall Street Journal (WSJ) had an interesting article that suggests Yahoo is ready for a shake-up.

The WSJ makes this case:

Consider the management question. A month after Mr. [Jerry] Yang, a Yahoo founder, took over from former Hollywood studio boss Terry Semel in June, he promised action to turn around the flailing Internet titan within 100 days. Nearly 200 days later, there is little sign of this. Since he took over, Yahoo stock has dropped 23%, while Google's has added roughly 10%. In the past two years, the company's value has been halved, so it is hard to see how investors would oppose a management shake-up.

The San Jose Mercury News had an article on Tuesday that said:

Yahoo is planning to lay off hundreds of people as part of an effort to refocus its sprawling Internet services to compete with rivals like Google and Facebook, according to a source close to the company.

It's unclear whether the cuts will be deep enough to satisfy Wall Street, which has been urging the Internet company to shed as much as 25 percent of its workforce of about 14,000. More than half of those employees are based outside of the Sunnyvale headquarters.

But the source said Yahoo also is planning to hire people to work on new initiatives, so ultimately there may be no reduction in the total head count . . .

Jeffrey Lindsay, an analyst with Sanford C. Bernstein, said in a recent research note that Yahoo should outsource paid search, automate display advertising and get rid of one in four employees.

Lindsay's suggestions zero in on Yahoo's main problem: They've continued to pursue a strategy of becoming the next best search engine even while losing search market share. The Mercury News says, "Yang has so far rejected the notion of allowing another company, like Google, to sell search advertising on Yahoo's behalf."

The Wall Street Journal had a second article about Yahoo on Tuesday, saying:

"...Yahoo has many strengths, but its primary weakness remains in search, where its U.S. market share has dropped to 17% from 22% a year ago, despite investing mightily to catch up to Google. An activist would almost certainly pressure Yahoo to swallow its pride and hand its search traffic over to Microsoft, or even Google, for a fat fee. Outsourcing search could boost Yahoo's revenue from the business by at least 30% to $3.5 billion, according to some analyst estimates."

Yahoo's pursuit of a larger piece of the search engine pie hasn't always been graceful. They've certainly managed to annoy me. My provider is Southwestern Bell (in partnership with Yahoo). About every fifth time I click on Google, I get a message asking if I'd like to make Yahoo my home page. This is NOT a good strategy for winning over customers.

The Saturday WSJ article said:

Yahoo is expected to provide more information about any cuts and activities it is scaling back when it announces fourth-quarter results Jan. 29. Any cuts would signal to investors that the company plans to maintain or improve profit margins . . .

At the close of market on January 22, Yahoo's stock price was $19.92. The WSJ estimates the market value of their assets at $28 billion. Shareholders would love to have access to the money value of those assets, particularly the Asian Yahoo Japan and Alibaba. The catch would be the taxable consequences of such a deal.

This is the kind of situation where a corporate finance expert with skill in putting together tax-free deals could help.

The Saturday WSJ article ends:

After outsourcing search to Google and reaping the cost benefits of a lessened head count -- another step investors would like to see -- Yahoo's stock could be worth as much as $36, according to a sum-of-the-parts analysis, or as much as two-thirds more than the current share price. For the right marauding investor, Yahoo looks like glistening treasure. Like all worthy plunder, it won't come without some effort. But for an activist hunting for a target, it looks like a pretty appealing start page.

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