There is only one way to solve Yahoo’s (YHOO) problems, and that’s by dismantling the company. It is the reverse of the value creation often promised and seldom realized in mergers. It is the inevitable end to a company that has failed to proactively respond to major trends like interactive social mobility.
It’s even more tragic because Yahoo has maintained one of the largest vibrant global user bases (more than 600 million unique visitors spending considerable time online) and leading online content verticals in finance, news and sports throughout its long-suffering value destruction -- almost in spite of itself.
Although that makes Yahoo the “largest digital content company” and the quintessential ad-driven media company of the Internet age, according to Needham analyst Laura Martin, the company still suffers from an inability to monetize its combined reach and prevalent content.
On the heels of ousting its unpopular CEO Carol Bartz and putting itself on the sale block, Yahoo is unleashing a bevy of new mobile devices, apps and newfangled features to play catch-up. While it is sure to stimulate some activity, the efforts are likely too little, too late.
Yahoo’s core mission is now to encourage and measure user engagement with content and email -- with the help of independent developers. It has all the inventive marks of Ross Levinsohn, Yahoo’s Americas executive vice president and former News Corp. (NWS) executive and former partner in Fuse Capital. The “facebar” feature launched earlier this fall reveals the Yahoo news stories recommended by friends. Yahoo’s iPad reader and its new Flipboard clone Livestand are a step toward monetizing interactive ads as a way to revalue the connection between marketers and consumers.
The issue will be how well -- and how quickly -- Yahoo moves forward on such new revenue fronts. Yahoo investors who “have been through a lot going back to the Microsoft (MSFT) takeout offer in early 2008, will have little patience for more rebuilding," according to JP Morgan Chase analyst Doug Anmuth.
Hovering over any hopeful prospects for Yahoo’s future is counterproductive speculation about who will eventually acquire Yahoo. In fact, it doesn’t matter whether a prospective buyer is Microsoft, AOL, a private equity firm (which will never pay to retool the company) or China’s Alibaba (OTC:ALBIY). Almost any new owner could only realize return on investment if it sells off the pieces of the company that are now more valuable than the whole.
For private equity investors to get to the business core of Yahoo, which can generate solid free cash flow and potentially be levered up, they need to find a strategic buyer for the Asian assets, Anmuth explained. Speculation has intensified that Yahoo Japan partner Softbank (OTC:SFTBF) soon will buy Yahoo’s stake for $6.4 billion. Alibaba CEO Jack Ma is on record saying he would like to acquire all of the U.S.-based Yahoo to fuel China’s explosive connected mobile growth.
The breakdown of Yahoo’s Asset Value per share is stunning. Of Yahoo’s overall $24.5 billion market capitalization, $14 billion is its 40% stake in the Alibaba Group, and another $4 billion is wrapped up in its 35% stake in Yahoo Japan, according to Citigroup analyst Mark Mahaney. Yahoo has about $3 billion in cash. That means its core U.S.-based online business is worth far less than it should be for what it is.
Yahoo’s dilemma is especially interesting in light of Groupon’s (GRPN) 10-times oversubscribed initial public offering (IPO) Nov. 4. Its initial $15 billion market cap does not reflect that the company is not quite profitable and already is experiencing rapid growth deceleration.
The Groupon IPO priced at $20 per share above the expected $16 to $18 price range, demonstrating yet again the market’s reckless exuberance for Internet players that clearly have limited value and long-term potential. Groupon’s first mover advantage already has been eliminated in the age of daily deal wannabes.
The lesson is that a company’s value cannot be guaranteed, especially without proactive building of new revenue streams. Yahoo has completely missed the early going on mobile and social interactivity -- and even video -- and all the monetization that goes with it! And it can hardly rely on its historical value proposition in a rapidly changing interactive universe.
The latest trouble signs at Yahoo, according to industry analysts:
Yahoo’s fundamentals are slipping. Revenue has declined 5% from a year ago in each of the past several quarters. Soft display advertising has dipped about 4% below analyst estimates for the last quarter. Profitability trends are also softening, even with operating margins growing 16% last quarter.
With its renewed Microsoft search alliance still struggling, Yahoo cannot afford to cede any share of the U.S. display advertising market. Yahoo needs to hang onto its position to capitalize on the growing numbers of brand advertisers that are migrating online. Yahoo also faces erosion as competition grows in display advertising, which comprises nearly half of its revenues. With 80% of its overall revenues coming from advertising, stiffer competition can take a hefty and swift blow to the bottom line.
The naysayers are making more convincing arguments these days that the battle for online search advertising dollars is virtually over and Google (GOOG) wins. RBC Capital Markets analyst Ross Sandler bluntly observes that his DisplayAd Monitor also shows “Yahoo ad quality deteriorating.” Revenue per impression is declining on lower average advertiser quality.
Yahoo joined Microsoft and AOL this week in announcing a partnership with Google and Facebook to sell each other's unsold premium advertising inventory. Yahoo, Microsoft and AOL continue to lose share while Google and Facebook grow their domestic display advertising business by double digits.
Changes that Yahoo made to its email prompted declines last quarter in the all-important areas of communications (down 9%) and in community (down 8%) without even including mobile, according to Mahaney.
Martin remains hopeful, insisting that closing the gap between the migrations of direct-response advertising and branded advertising is a $30 billion annual opportunity ripe for Yahoo’s taking. But Yahoo’s 18% share of the $12 billion online display advertising market in 2010 is eroding.
We’ve seen all this before. There are no second acts in the Internet space, as witnessed by News Corp.'s MySpace and the chronically hanging-on AOL. The rapid diffusion of advertising dollars and consumer eyeballs makes reversing the trend a near-impossible task.