Yahoo! (YHOO) is Silicon Valley's soap opera. Constant leaks to the press, a constantly shifting focus, and a revolving door in the C-suite make Yahoo! unlike any other major company in the Valley. However, Yahoo!'s newest CEO, Marissa Mayer, is the best chance yet that the company has for revitalizing itself, and we think that the company's stock is a buy on the back of this development.
The Surprise Announcement
After the markets closed on July 16, Yahoo! announced that Marissa Mayer, Google's (GOOG) chief of location and local services (Maps, Earth, and Zagat, as well as other products), was named as its new CEO. Mayer was Google's twentieth employee, and a part of its operating committee, which works directly with CEO Larry Page and co-founder Sergey Brin. We, alongside almost everyone in the technology industry and press were surprised by this; it was widely expected that Ross Levinsohn would become the company's permanent CEO. Yahoo!'s stock rose about 2% in after-hours trading. And in a stunning turn of events, Kara Swisher and AllThingsD did not have the scoop on this. Rather, DealBook (of the New York Times) broke the story.
This move by Yahoo!'s board was widely praised, with figures such as co-founder David Filo, Jack Dorsey, and Dick Costolo all supporting the move. Marc Andreessen is "stunned" that Yahoo! was able to lure Mayer, saying that, "I didn't think they could get someone like Marissa." We think that this appointment will work out well for Yahoo!, and are planning on buying shares on the back of this development. We outline our bullish thesis below.
With Mayer at the Helm, Focus can Return
The revolving door in Yahoo!'s C-suite is one of the key things responsible for the company's lack of focus, and Mayer will be Yahoo!'s 3rd permanent CEO since 2009 (Bartz, Thompson, and Mayer). She would be the 5th CEO in 5 years counting the company's interim CEO's (Tim Morse and Ross Levinsohn). Yahoo!'s focus has lurched all over the spectrum over the past few years. The company seems unable to decide what it is. Is it a media company? Is it an advertising company? Or is it a product company? No one seemed to know, least of all Yahoo!. With Mayer at the helm, Yahoo! is set to return its focus to products. According to sources close to the board, Mayer was chosen because she is "product-focused" and "focused on the user experience." Other reasons Mayer was chosen include her ability to manage and recruit talent to Yahoo!, as well as the fact that she is a "big name."
In our view, Yahoo!'s problem has been not that it is focusing on the wrong thing, but that it isn't focusing on anything at all. Advertising, media, technology, or products are all valid businesses to be in. Yahoo! needs to choose one and actually commit, not lurch between different areas without ever truly innovating in any of them. And as Dan Frommer points out, Mayer actually has a computer science degree (from Stanford), and her name and experience could recruit people to Yahoo! that would be impossible to get under previous CEO's. If there was ever a CEO that could lead Yahoo! to focus, it is Marissa Mayer.
Google's Export: Technology Executives
Leaving Google is no easy task. Google's position at the top of the technology industry makes it a great place to work. And Google's executives are paid quite well, and most are already very wealthy when they leave Google. If that is the case, why not simply retire? The answer is that these executives leave because they believe in what they are doing at their new companies, and they want a chance to leave their mark on the technology industry, outside of Google. Mayer is but the latest in a line of prominent "Googlers" to leave the company for other technology companies. Sheryl Sandberg left her role as vice president of sales to become COO of Facebook (FB). Dick Costolo left Friendster (bought by Google) to become COO (and then CEO) of Twitter. Deep Nishar was head of Asia-Pacific strategy at Google before leaving to become senior vice president of product and user experiences at LinkedIn (LNKD). Bret Taylor left Google to become CTO of Facebook. And Tim Armstrong left his role as head of sales and President of the Americas to become CEO of AOL (AOL).
Tim Armstrong serves as a precedent for how Google's executives can lead a company. Under Armstrong, who became CEO in early 2009, AOL's stock has risen over 21% since it was spun off from Time Warner (TWX). While that performance lags that of the S&P 500 over that time frame (up 24%), it far exceeds that of any of AOL's competitors, including Yahoo!, Google, or Microsoft (MSFT).
Click to enlargeMarissa Mayer is not simply some Google executive. She was the company's 20th employee, its first female engineer, and played an integral role in helping the company grow and succeed. Simply put, if anyone can fix Yahoo!, it's Marissa Mayer.
Why Take the Job?
Why in the world did Mayer agree to become Yahoo!'s CEO? On the surface, it makes little sense. Mayer is estimated to be worth $300 million, and there is no need for her to work ever again. And in the pecking order of the technology industry, Yahoo! is far below Google. Why would anyone leave Google to become the CEO of a company that seems to define dysfunction?
In our view, someone of Mayer's caliber would not take this job if she did not feel it was one she could be successful in. Otherwise, there would be no point in leaving her position at Google, where she was one of the most prominent and powerful executives. Some may argue that Mayer's shift from being head of search to head of local was a demotion, which would imply that Mayer is not as valuable as she seems. However, given the fact that Mayer was also appointed to Google's operating committee (a very high honor according to sources close to Google), we do not see this as a demotion. If anything, we see it as a sign of the faith that Google had in Mayer. Google's position in search is solidly secure. Yet it is in areas like local products (alongside mobile) that Google's future will be won or lost. And perhaps Google thought that with Mayer in charge of local products, Google would be able to keep its competitors at bay.
It makes no sense to leave Google if you do not think that you will be successful in your new job. All of the "Googlers'" that have left the company in the past several years have been successful at their jobs [people like Sheryl Sandberg and Deep Nishar work for successful companies, and Tim Armstrong's company has outperformed all of its competitors since it returned to the markets (in the end, it is a company's stock price that determines whether or not a CEO is successful)]. Mayer would not have left Google if she thought she could not make an impact at Yahoo!. It is one of the core reasons we are confident that Yahoo! will now have a decent shot at being able to revitalize itself, and ultimately deliver meaningful growth in profits and revenues at its core business (as opposed to simply relying on Alibaba and Yahoo! Japan).
However, There is a Risk
There is no such thing as a perfect CEO (managerial issues aside, Steve Jobs?), and Marissa Mayer does lack something that Ross Levinsohn, Yahoo!'s former interim CEO, has: advertising experience. Ross Levinsohn, who was the head of Yahoo!'s global media business before being named interim CEO, has a deep and productive relationship with the advertising industry, and this is an issue that AdAge raised when it learned that Mayer would be the company's permanent CEO. Mayer will need to deal with both Yahoo!'s products as well as advertising issues as CEO, and advertising is an area that she has less experience in. Will she be able to build the kind of relationships with Madison Avenue and the broader advertising industry that Levinsohn had. However, we think that this risk will be minimal, if Levinsohn will stay at Yahoo!. So far, sources close to Yahoo! say that Levinsohn has yet to decide one way or another as to whether or not he will stay at Yahoo!. Should he leave, it could be an issue for Yahoo!. However, Levinsohn is seen as a valuable part of Yahoo!'s leadership, and Yahoo! can always increase his compensation, as Marc Andreessen believes.
Yahoo! is a company that has been in need of clear focus and leadership for years. With Marissa Mayer as the company's new CEO, however, Yahoo! has its best chance in years to revitalize the company and take it out of its malaise. Mayer has the experience and the capability to fix this company, and out of all the CEO's to lead Yahoo! over the past several years, she is the one we have the most faith in. We plan on buying shares of Yahoo! sometime over the next several days, and think that investors should either add to or initiate positions in Yahoo! based on this development.
Additional disclosure: We are long shares of GOOG and MSFT via a mutual fund that assigns the companies a weighting of 2.21% and 0.95% respectively. We plan on buying shares of YHOO sometime in the next few days.