Yahoo Inc. chief Jerry Yang recently summarized a plan to turn the straggling company around by becoming the start page for every Internet user across the globe.
What Yang failed to provide, however, was a convincing solution to Yahoo’s existential crisis. The Hamlet of the Web won’t succeed by simply trying to become a start page. Yahoo is navigating the waters of Internet advertising like a goldfish evading a shark, namely its archrival Google Inc. Activist investors ought to take heed—Yahoo is ready for a shake-up.
The Sunnyvale, California-based Yahoo has many ingredients that make it a tantalizing target for uppity investors: a discredited management team and a corporate strategy in need of a makeover, share price underperformance, a large free float with no controlling shareholder, cash on the balance sheet, and many moving parts whose values do not appear to be adequately reflected in the Yahoo share price—particularly its investments in two hot Asian Internet firms.
First, consider the management question. A month after Yang, a Yahoo founder, took over from former Hollywood studio boss Terry Semel in June, he promised action to turn the flailing Internet giant around 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%. Over the past two years, the company’s value has been halved, so it’s hard to see how investors would oppose a change at the top.
On strategy, Yahoo has many strengths but its primary weakness remains in search, where its US market share has dropped to 17% from 22% a year ago despite investing mightily in catching up to Google. An activist would almost certainly pressure Yahoo to swallow its pride and hand its search traffic over to Microsoft Corp., or even Google, for a fat fee. Sanford Bernstein estimates outsourcing search could boost Yahoo’s revenues from the business by at least 30% to $3.5 billion.
Then there are Yahoo’s stakes in Yahoo Japan and Alibaba.com Corp. They’re worth $9 billion (Rs35,370 crore) and $4.4 billion. If monetized, the two stakes, which represent a huge chunk of Yahoo’s $29 billion market cap, could provide a windfall for the company’s shareholders. But there’s a problem. Yahoo would incur steep capital gains taxes in a sale unless Yahoo gets creative with its finances. 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.