Yahoo Reloaded: New CEO, New Strategy?

You probably know the story behind Yahoo (YHOO). The ex-CEO, Jerry Yang, got the offer of his life from Microsoft (MSFT) at $33 per share (when the shares were traded at around $28). And yet, he refused it on unclear grounds, asking for a higher offer and going against the opinions of Yahoo's shareholders. And now he pays the steep price of being forced out...

How to blow a company

Yahoo was always regarded as the internet's darling. Without any enemies, with an excellent public image and a share price of $25-$28/share in the first half of 2008, it always seemed a good investment bet. And the unsolicited offer from Microsoft seemed to be the cherry on the cake. Jerry Yang probably thought that if they resisted the temptation a little bit, the bidding price would go much higher. It had happened before, after all. And in most of the cases, the research showed that the target's shareholders extracted most of the value from these acquisitions, not a mere 18% as was implied by the first offer.

But it was not meant to be. First of all, Microsoft backed down and did not continue with any offer. Or at least, they did not raise the price, considering (rightly so, in retrospect) that the company was not more valuable than $33/share. It was, of course, Yahoo's turn to prove them wrong.

But the shareholders got angry as the summer months passed and Yahoo started to make mistakes. The famous search deal with Google (GOOG) was not only rejected by the anti-trust authorities, but also passed market share to Yahoo's ever present competitor. In December, investors urged again for a deal with Microsoft, but the price (now at $12/share) made it impossible to negotiate further. And of course, the lack of meaningful projects in the pipeline offered no reason for a rebound in share price.

New CEO, new strategy?

Carol Bartz's appointment as the new CEO of Yahoo marks a new era for the company, that is for sure. With the symbolic sacrifice of Yahoo's founder, the shareholders finally exerted their wrath on the one who refused the offer. The appointment of Carol Bartz on Tuesday is somehow a refutation of the shareholders - she comes from Autodesk (ADSK), where she increased the revenues 5 times in 14 years - not bad, but also not spectacular. She also misses two essential qualities needed for Yahoo: the internet experience and the deal-making ability. Since the latter is seen as a salvation for Yahoo, this means that the company will probably enter a new era - new programs will be launched regardless of their risk to the company, while the already started cost-cutting will hit the already battered company even harder.

Whether the turnaround will work remains to be seen. On one hand, the advertising market has shrunk substantially, leaving Yahoo battered and over-dependent on the fickle US market. On the other hand, since Bill Gates went on record naming internet "just a fad", Microsoft has one shot left to make it big in the sector, so they are definitely still interested in buying Yahoo. The company's actual share price reflects its economical grim reality, and does not include any future meaningful projects. Yet, nobody has any magic rabbit in the hat for Yahoo. So it remains to be seen whether the money you would invest in Yahoo is worth the return. I would say it's a risky one, but still worth it - especially if you are still in love with the technology sector...

Disclosure: No positions held by the author in the US internet or software sector (including Google, Microsoft, Autodesk or Yahoo).

Comments

[CFed:]

Looking back at Brad Garlinghouse's memo of 2+ years ago (online.wsj.com/public/...), I don't think Yahoo's problems are with internet experience, or with the deal making you cite as key negatives to Carol Bartz's election as Yahoo CEO.

She was successful in navigating a chaotic situation at Autodesk by installing accountability and aligning it with authority. Just what the Dr. should order for Yahoo.

Jan 14 09:31 AM

[jenny:]

After reading some of the articles about what Carol says, I'm beginning to like her more. She has a backbone and is strong enough for this company. Give her some time to catch up on her internet experience and she could be good. Investors seem to be warming up to her as well- Yahoo's slowly becoming more bullish and the majority of predictors have predicted up. (www.predictwallstreet....) YHOO is actually one of the few stocks up today.

Jan 14 02:09 PM