Why Is Yahoo's Marissa Mayer On A Buying Spree?

| About: Yahoo! Inc. (YHOO)

Marissa Mayer, former Google (NASDAQ:GOOG) executive and present Yahoo (NASDAQ:YHOO) CEO, has been able to turn Yahoo from a floundering behemoth to a company with lingering promise, in less than a year. Some of the steps she has taken so far to turn the company around include coming up with a new Flickr application, modifying Yahoo Mail, revamping Yahoo.com and many more. Recently she has been making a number of acquisitions in order to provide a substantial improvement over Yahoo's previous year's performance.

Whether her new strategy behind all these acquisitions will be able to solidify Yahoo's fundamental business is the question.

Yahoo's survival through years of turmoil:

Yahoo has been facing trouble since its previous CEO Scott Thompson was ousted due to some resume over his college degree. His departure made Yahoo even more fragile than it had been. Due to this, the company once known as the premier digital media company lost some of its business strongholds to newer entrants like Google and Facebook (NASDAQ:FB).

The main challenge for Marissa Mayer was to define a new strategy for a struggling company desperately in need of a new vision. Marissa not only saved Yahoo's business from a tottering phase, but also increased its overall growth rate. Right after her arrival, in September 2012, Yahoo was able to hold its revenue growth rate to a drop of only 1% compared to earlier quarters. Marissa also reorganized the company and focused on Yahoo's original value proposition i.e. search, so that she could drive out smart distribution deals and expand the company's market growth. Also, she asked employees to stop working from home in order to accelerate productivity.

Marissa's New Strategy:

Marissa's work started with a bunch of acquisitions for Yahoo's financial stability. She looked for smaller-scale acquisitions (i.e. spending less than $100 million) to align different companies with Yahoo's overall businesses. Mayer mainly intends to acquire start ups that deal in user generated content. The strategy behind these acquisitions focuses on three core categories: Mobile, Content and Search.

According to the company's CFO Ken Goldman, Yahoo still has sufficient liquidity of around $2 billion to carry out these acquisitions despite its lagging growth. Also Yahoo's new objective would be to leverage its strengths and available resources to bring out a transition in the company. Some of the acquisitions that Yahoo has made so far include:

Stamped: This company, started in 2011, was a New York City based start up. In November it was first launched as an iPhone app. This app lets users to share things or places they like for e.g. films, restaurants, books etc. with their friends. As Stamped was well within Yahoo's price range, the latter acquired it on 25th October 2012. It was the first acquisition that Yahoo made under Marissa Mayer's leadership.

OnTheAir: This San Francisco based video-conferencing start up was bought by Yahoo on 4th December 2012. It uses web RTC technology for all its operations. This was Yahoo's second acquisition since Mayer joined it. Although OnTheAir's technology was on live streaming webinars, it planned to focus on mobile as part of the acquisition. The valuation of this start-up was not disclosed by Yahoo.

Snip.it: This site allows its users to "snip" online content to a page and organize it into a collection. Then it can be subscribed to by their friends to read all the things that were referred. This San Francisco start up which was founded by Ramy Adeeb has been acquired by Yahoo for a sum of $10,000,000 on 22nd January 2012.

Alike: Yahoo had acquired Seattle-based Alike, a location discovery app on 12th February 2013 for an undisclosed sum. This mobile technology works on user's personalization i.e. it helps to discover nearby venues and places to visit.

Jybe: Jybe, a social recommendation start up, was acquired by Yahoo on 20th March 2013 for an undisclosed amount. This Silicon Valley start up had developed a mobile application that recommends books, restaurants, movies etc based on the data contained in social networking sites.

Summly: On 25th March 2013, Yahoo bought a UK based start up Summly, a news summarizing mobile app, by paying a sum of $30,000,000.

Astrid App: Yahoo has recently acquired this task manager app for an undisclosed amount. This 2008 founded company deals with email management and to-do app space. It also helps to create lists and reminders and allows its users to share it with others.

Planned Acquisition of MileWise: While continuing with its acquisitions, Yahoo plans to buy another New York travel start up, MileWise. It is a travel rewards site that raised a lot of money from various Venture Capitalists and Angel Investors. It will help Apple's (NASDAQ:AAPL) users to redeem points from travel loyalty / reward programs through its website and iOS/Android apps.

By acquiring this 2010 founded start up, Yahoo wants to interact with its users on a daily basis. And as travel plans and rewards tracking could be a part of day-to-day services, MileWise could make Yahoo a big player in the mobile industry by 2015. MileWise has competitors like Google's Flight Search, Hipmunk and Priceline (NASDAQ:PCLN) owned Kayak seems to gel well with Yahoo's new mission to grow its mobile presence through smaller acquisitions.

All these acquisitions are part of Mayer's strategy to expand and reinforce Yahoo's expertise and its mobile offerings. It will help Yahoo accelerate its focus on major growth markets as well as developing geographies.

Yahoo's Gain from these acquisitions:

Yahoo currently has roughly 300 million monthly active mobile users up from 200 million 3 months ago. All the acquisitions that Yahoo made to date have accelerated the company's efforts to make it a world class technology leader. Looking at the financials, Yahoo's stock has increased by 60% under Mayer's leadership. This is mainly due to the rising value of the company's holdings (24%) in some rapidly growing companies like Alibaba Group, a Chinese Internet Company (earlier Yahoo acquired 20% stake in it) and others. With a market capitalization of $27.78 billion, Yahoo's first quarter earnings report states that it earned $390 million, a 36% increase from its income of $286 million last year.

In short, it can be said that Yahoo is making more money under its new CEO Marissa Mayer, even though it is struggling to sell its ads, the main contributor of its revenues.

What else has the new CEO planned for Yahoo?

Although Yahoo was once a leader in display advertising, now it has lost its position to its rivals Facebook and Google. Under Marissa Mayer's guidance, Yahoo not only has picked up engineering talent but also some of the key technologies at cheaper rates. She has also brought some major improvements to let Yahoo enter the upcoming social marketing sector.

Apart from bringing a complete makeover to targeting some of the start-ups, Marissa has also encouraged various investors with her strategy to attract more traffic by selling more advertising. Moreover, in the future she can start rebuilding Yahoo's brand name by introducing some newer web services. She can also focus on generating a revenue stream by tying up with social networking sites like Facebook etc. Also her expertise on search experience can help Yahoo bring back its old magic in search.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: StockRiters is a team of analysts. This article was written by Apoorva Soni, B.Tech, MBA - one of our analysts, and edited by Shas, StockRiters' Editor-in-Chief. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.