The Market Reaction To Yahoo's CEO Announcement Misses The Big Picture

Jan. 4.12 | About: Yahoo! Inc. (YHOO)

Months after firing prior CEO Carol Bartz and undertaking a strategic review Yahoo (NASDAQ:YHOO) announced Scott Thompson as its new CEO. Thompson’s background is given in the press release:

“Thompson served most recently as President of PayPal, a division of eBay, where he continued his established track record of growing businesses by driving customer engagement built on strong technology platforms. Under his leadership, PayPal solidified its lead as the global online payment service, expanding its user base from 50 million to more than 104 million active users in 190 countries worldwide, increasing the number of merchant partners to more than 8 million globally, and growing revenues from $1.8 billion to $4+ billion in 2011.”

The stock has reacted negatively and is down almost 2.5% on the day. I believe this reaction misses the big picture. While some short-term traders hoping for a quick pop may throw in the towel today, anyone with a medium to long-term view should stay the course and even increase positions on this news.

The short-term traders may be interpreting the announcement as negative for several reasons.

First, the probability of an outright sale of the company in the short-term is slim to none.

Second, on the conference call board Chairman Roy Bostock suggested that Yahoo would not “go private.” Specifically, Bostock said:

“As a public-private issue, we are a public company. I do not envision us not being a public company going forward with a company with roughly a $20 billion market cap. Just if you want to look at it in a practical way, if you and I were to sit down tomorrow and say let's take this company private, I think we have one hell of a challenge on our hands to do that. And I don't – it is not on the radar screen or in the consideration set. We are public company. We expect to run this company as a public company. We expect to run it for the benefit of the shareholders of a public company going forward. So I think in one way it's a moot issue, frankly, from our point of view. Next question, please.”

Of course this statement by Bostock does not eliminate the PIPE deal that has been rumored in the past, but it makes it less likely. It’s also less likely if the board has come to its senses, sought legal counsel, or just listened to activist shareholder Third Point who pointed out in a letter to the board that the PIPE deal hurts current shareholders and as Third Point states in their November 4, 2011 letter “makes no sense and its only purpose would be to put substantial equity stakes into friendly hands to entrench management and transfer effective control without payment of a premium or even, it appears, a shareholder vote. Nothing can excuse such an action, and shareholders will not be bought off with a dividend of our own money while value is destroyed.”

Third, some investors who are waiting for a monetization of the Asian assets may view this as less likely and/or it will take additional time given that the new CEO will have to get up to speed and take a view on the potential transaction.

However, this timing question was addressed on the conference call. In response to just this question Bostock said:

“Let me take the first question on the Asian assets. That will not be a distraction for Scott. As I said earlier, he will obviously join in, jump on the running board of the car as it's moving along, but there is a team working on that. It's an excellent team, and he will be a part of and then obviously a key decision maker as we move forward. But given where we are and how we have gotten there and the people we have staffing that, there is no way that that will be a distraction to Scott as he moves into his position and as he concentrates on the core business. So I don't think that that's an issue at all, quite frankly.”

In the press release and on the call the point was repeatedly made that Scott Thompson will focused on the core business:

“"Scott brings to Yahoo! a proven record of building on a solid foundation of existing assets and resources to reignite innovation and drive growth, precisely the formula we need at Yahoo!," said Roy Bostock, Chairman of the Yahoo! Board. "His deep understanding of online businesses combined with his team building and operational capabilities will restore the energy, focus, and momentum necessary to grow the core business and deliver increased value for our shareholders. The search committee and the entire board concluded that he is the right leader to return the core business to a path of robust growth and industry-leading innovation."”

This could suggest that a monetization of the Asian assets is still very much in the cards and Chairman Bostock’s statement makes it clear that a team within Yahoo is currently engaged in assessing a deal.

In summary, Yahoo is still very much in play. The only strategic option taken off of the table is a LBO of the entire company. But, the goals of the activist investors to maximize shareholder value are strengthened by having a competent CEO who is respected in Silicon Valley with a mandate to fix Yahoo’s core business.

A scenario that involves a monetization of the Asian assets in the next few months with a new CEO focused on reinvigorating the core business seems quite probably and would be value accretive to shareholders.

Disclosure: I am long YHOO.