Alright, alright, I know. It’s funny to pick on Yahoo (YHOO) CEO Jerry Yang. It seems that a lot of people are doing it now. But before I get any more calls telling me what a nice guy he is, let me explain something.
I don’t doubt Jerry is a nice guy. Hell, if I had a couple of billion lying around the office, I think I would be a lot nicer too. I would even give my wife the extra $300 she wanted to go buy some more junk at the farmer’s market. Ok, ok, maybe not.
It seems that a lot of people really like Jerry; at least a lot of his employees. That’s great. He could be the greatest guy in the world. But he is in trouble now. Not because he made a mistake. Everyone makes a mistake now and then. Maybe he was right, maybe teaming up with Microsoft (MSFT) would have destroyed his vision, destroyed his company. So from that perspective, maybe it was good that Microsoft “walked away.”
But he is in trouble nonetheless.
Wall Street does not like deals that don’t get done. The arbitrageurs
lost money, hedge funds lost money, mutual funds lost money, employees
lost money, shareholders lost money and, more importantly, the Investment
Banks lost some big fees.
Now I know this is going to sound ridiculous. I am going out on a limb here, but apart from the money and fees involved in the deal, I kind of doubt that Wall Street really cared whether the Yahoo culture survived, or whether there was a Chief Yahoo!, or even whether the deal was successful three years down the road. I’m sure Jerry did.
But the deal is not about Jerry. It was not Jerry’s company to sell or not sell. He was a fiduciary for all the shareholders, even the guy who mortgaged his house to buy Yahoo stock the day before because he was “sure” the deal would get done.
So you may say, shareholder lawsuits – that’s his problem. No, that is a problem, a cost and a distraction. However, I am sure he can rely on his Banker’s valuations showing that Yahoo was worth 37, 38, 40 or whatever. After a few million in fees, Yahoo will pay the standard greenmail to the class action lawyers and maybe the stockholders that lost money will receive a discount on their next Yahoo website purchase.
His problem is that he has lost the faith, and maybe even the goodwill of Wall Street. Yahoo stock is now supported in price because of two things. First, at a price per share between $24 and $26, a majority of the calls and puts for May will expire worthless. So look for the price to stay in that area for the next ten days until the May options expire on may 16th. Hey, I’m not saying that Wall Street would try to “manage” the price of the stock to minimize paying out anything on the calls and puts. Hmmm?
Second, the Bankers would still like to get the deal done or at least make a last ditched effort to get it done. But if a deal gets done now, it’s going to be without Jerry, probably negotiated by the Board, and what are the odds that Jerry sticks around after any new deal gets done? Slim and none. What happens to the Yahoo culture then?
And why would Microsoft rush back in to buy right now? For all purposes, absent some dissenters, Wall Street thinks Yahoo blinked. Is the reason the deal didn’t get done really that Microsoft didn’t put it in writing? If a deal does get done now, it may get done at $33, but the terms are going to be way different.
So what happens to Yahoo stock between now and the shareholder meeting in July? Absent a formal resurrection of the deal now, it either goes much lower or drifts lower. Yahoo has already publicly stated that this year is a rebuilding year and their first quarter supports that theory. Furthermore, the economy is shaky and advertising funds may be dropping. [Although a good contrarian would tell you that now would be the time you need to advertise more]. In addition, Yahoo now has to be very careful in what they say in the press about their performance – meaning they have to be very conservative.
So what should Jerry do (“WSJD”)? Here is a little general advice.
- Shut Up – No more management interviews with the press. No more Board of Director interviews. No more blaming the Bankers or Ballmer or anyone else. Don’t explain anything. No coordinated or uncoordinated public relations attacks. Release a simple statement – “Yahoo’s Board of Directors could not reach an agreement with Microsoft on a combination of the two companies. Yahoo is dedicated to maximizing the value of our stock, our brand and our platform for the benefit of our shareholders, our employees and our customers.”
- Stay Focused – Between now and the shareholders meeting, you don’t need to overtake Google. You just need to make progress. Keep your focus and concentration on your key strengths. One of the reasons Microsoft wanted you is because you have a strong brand and are a starting point for a vast number of customers on the web. If you can’t “own” the technology, you need to “own” the customer base. That is your advantage. Focus on it and strengthen it.
- Decide What You Want to Be – Don’t try to be all things to all people. You don’t need to own the entire Internet to be successful. That is one of Microsoft’s issues, but with a cash flow of $2-$3 billion a month and about $30 billion is cash, they can afford to make multi-year mistakes. You can’t. Google became successful by focusing on paid key word search, and they got to be the best. They have been branching out to other areas now and have been losing key people to Facebook and others. They will be having their own growing pains, quit worrying about them. Focus on your customers and the things you can control.
- Cut Out the Fat – For the past two years, your revenue has grown over 32%, but you keep bringing less to the bottom line. Yahoo’s R&D expenses average about 15.5 % of revenue, while Google’s R&D expenses average only 12.5%. But the biggest problem appears to be your general and selling expenses, which are twice as high as Google’s as a percentage of sales. You spent $392 million in selling and general expenses alone to create an additional $380 million of gross profit. You really need to focus on bringing the SGA under control, QUICKLY. Automate, automate, automate.
- No Partnerships with Google (GOOG) – You really want to give them part of your keyword ad business as a test or as a partner with them? Partnerships are not all they are cracked up to be, you should know that by your AT&T (T) partnership. Partners always want more of the pie. Don’t fall into the trap now of generating revenue by giving your biggest competitor access to your business or customers. Bottom line – you give them that business and they own you, assuming you could ever get anti-trust approval.
- Possible Deals – If you want to do a deal, my guess is the best deal would be to acquire AOL. Time Warner (TWX) probably doesn’t want to be in that business. It has been struggling for years and losing subscribers. It does however have a large customer base which you could transfer to Yahoo. It had 109 million page views in February compared to your 137 million. It is using Google for its advertising sales, so by shifting AOL to Yahoo, you can actually take business away from Google, if it makes sense. You also could achieve some benefits of scale and cut out duplicative costs, and make some money from the conversion of the AOL dial up customers. This may not be the best deal in the world, but if you are going to fix Yahoo, you might as well fix AOL too. Now it’s your turn to be the acquirer and play hardball. Time Warner shareholders and management really don’t want AOL. AOL almost destroyed their company for a decade. They would be happy to get rid of it. If you can’t get it on your terms, focus on turning those AOL subscribers onto your platform. Don’t defend. Attack.
- Keep It Simple – Take My Wife – If you are going to maximize revenue and monetize your customers page views, you need to remember your customers. They want things simple. My wife is an average Internet user, and she complains about why isn’t it easier to do research with all those ads. There are pop up ads, display ads, rollover ads, voiceover ads, video ads. She uses the internet to search for products, but she also wants information. Give her the ads she wants when she is searching for products and allow her to input a zip code so she has the choice of national ad or local ad searching without going to the yellow pages. She really may not want to drive to Atlanta to pick something up or wait for it to be shipped. If she has a local ad, integrate and upgrade Yahoo coupons so a coupon pops up when she gets the local listing. You could even integrate and upgrade Yahoo coupons to your Yahoo home page in a manner so she can input a zip code and a product and get a coupon, and have Yahoo take a fee for the coupons used. I am really tired of looking at all the unorganized coupons on my dining room table.
Better yet, could you put that all on her cell phone because she doesn’t go anywhere without it. Better hurry though to reach for those “Clouds”. Hey, you both hate Microsoft, what about teaming up with Steve Jobs, Apple (AAPL) and the iPhone?
- Show Some Personal Faith in Yahoo’s Prospects – Go buy 5-10 million shares of Yahoo to show the shareholders that you really have faith in the future of the company.
And remember, to compete with Coca Cola (KO), you need real estate, manufacturing facilities, warehousing, great formulas, packaging, advertising, distribution, product placement, logistics and scale.
In your business, you need a computer, an idea and a dorm room. Now you know why Warren Buffet stays away from Internet companies.
