What Should Jerry Do? My Advice to Yahoo

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 16^th. 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.

1. 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.”
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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?

8. 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.

Comments

[raman kandola]

Jerry is a thought full guy first of all. Personally I believe, YAHOO has a great mangement, and having a thougt of selling the company for less than $50 billion is a shame. Think about it this way, Facebook has a market cap of $15-20 billion dollar ! A chewing gum (Wrigley) has a value of more than $23 billion dollar ! Then YAHOO should be worth more than $50 billion >? They have a grat presence in Asia Pacific (Japan, India, etc.) Stakes in companies like Alibaba, Blue Lithium, etc. They have spent, and invested billions of dollars .... in those acquisitions..

Best bet for Jerry is to focus ! focus ! focus ! on yahoo forget about the MSFT, GOOG, etc.. They are the bigget portal site in the world.

[Marco Di Nucci]

Microsoft needs Yahoo and Jerry understood; Microsoft is spending so much money in internet sector but never gain market, all programs are everyday more webbased, Firefox gained market until now to 28%... Microsoft already didn't success to buy Google, this is last chance ? Aol is the alternative ? ah ah.. Yahoo is strong in Asia as noone and as u know Asia is growing so much...
Microfot will buy Yahoo and to save money is losing too much time giving other markets to Google

[Noreen]

I really enjoyed the article along with the self deprecation before making a suggestion--but hey we've all got ideas on what is best here.

My only change is that I would "not" suggest that Yahoo buy AOL. AOL's been floundering and it brings no new opportunity for Yahoo. Everyone involved with AOL longs to pass it on and there is a reason. Let AOL go its a concept that has lived its lifespan and must die a natural death.

Yahoo has a lot to offer. It has one of the best email services and a huge amount of users who have selected it to be their home page. In addition, the small business services and website offerings are amazingly well done. My advice is to stick with the big boys and let them come back a courting.

Microsoft could use what Yahoo has built the most. Lets face it, although Microsoft has the desktop it has failed miserably on the internet front. The services Yahoo offers would benefit Microsoft immensely. In my mind Ballmer is no fool--he'll be back. He needs Yahoo. Yahoo would just be an absorption for Google in many ways. Absorption is not a bad thing when you have money to burn and competition to oust but need--need is a whole other animal and Microsoft needs Yahoo.

My advice to Yahoo would be to merge with Mozilla the acquisition or partnership with Firefox would be a huge wake up call to Microsoft. Apple is another great option for Yahoo. A merger with Apple would make Apple a force to be reckoned with across desktops, gain mainstream usage beyond the Iphone. Maybe wake up AT&T to put more money on the table as well. Now that is just the ticket! Seeing Apple get more desktop and moving into more mainstream--even that possibility should send shock waves through Microsoft. If the PC loses it positioning you will really see Ballmer move --perhaps into retirement.

One thing is clear here--this is not over. Its just beginning to get interesting.

Noreen

[John Capozzi]

Yes i am a Yahoo shareholder and yes i lost a lot of money here and the stress has been unbelievable. I had changed my investor tactics and have taken it on the chin. I was looking up every angle here and most of all Yahoo's Asian properties and even to this day i cannot see why this deal did not close at the very little 35 to 36 dollars a share. Asia is the biggest market for all in the 100's of billions of dollars by 2010 in internet access and search and add and Yahoo is well positioned with Allibba and Softbank. I would like to see a Biadu, Allibba and Softbank team up instead of Microsoft and funding could easily come from the Chinese Government with Allibba's Jack Ma's ties and take out Yahoo for over 40 just like they did with the Lenovo deal buying out IBM's personal computer sector. The anti trust issues and even national security issues because of Telllabs government technology passed and it was done. This would also open the USA markets and more worldwide. This Microsoft merger would have been done in March if both sides just had sat down and talked and invited Allibba and Softbank in the talks. What really happened here? The build up in the media taking many small shareholders for the ride made this deal a sure thing. I remain positive though that a deal will be reached in the next few days at 35 to 36. If Microsoft does not give the 35-36 they will lose Allibba which is the key property in China for Yahoo.They already have an interest in Biadu and Baidu could turn around and buyout Yahoo's interest of 40% in Allibba. Microsoft can say goodbye to search and add if they dont buy Yahoo. they have tried by buying smaller companies and it didnt work. Now they are trying to buy a 2.5 billion dollar company face book at 24 billion. This does not make sense either. Two great companies Yahoo and Microsoft could be the king in this market if they just have their bankers sit down and close it at 35 to 36 now today and anounce it and get to work. Anymore demands at this point or changing of tactics will not work. People, and major investment companies have gotten hurt by ego problems and lack of communication skills. I dont know how take over specialist that have been hired in the millions of dollars could not get this deal closed when they were so near the mark. Mr. Balmer and Mr. Yang shouldnt be the only ones to take blame here. The best bet and thing here is that Mr. Balmer and Mr. Yang get back together now and have their bankers close this deal now between 35 to 36 and make everyone save face and two great companies will know that their companies will be a giant and can be assured that they will grow with the future and not disappear.

[Goma]

Where can I sign up for legal action against Yahoo and Jerry Yang? Jerry is saying that Yahoo is worth more than $33/share. It seems to me that Yahoo is worth exactly what the open and free market says it is worth. Right now it is $25/share, maybe in a few weeks a lot less. Jerry's fiduciary duty is not about culture, it's about dollars and serving in the best interest of the shareholders. If Jerry is so convinced that Yahoo is worth $37/share feel free to start buying back shares in the open market for $37/share. You can buy my shares today. Unlike the billionaire Jerry, my shares are in a very much needed IRA account. For Yahoo and Jerry to walk away from $33/share is a crime to the shareholders.

[BATO n COMPANY CHGO.]

PAIN,PAIN,PAIN.Who doesn't want to get more in this transaction?Ballmer is not interested in a win-win situation.I can't blame him nor mr. Yang for their actions.It hurts to lose but I still believe that Yhoo is worth alot more than msft is willing to pay.It's not going tobe that easy for Yhoo to negotiate when they're constantly distracted by some of their own shareholders."He who has the GOLD rules" is the new golden rule.

[aruna]

I second John Capozzi. I am also a yahoo shareholder who can not put up with this stress anymore

[aruna]

i second John Capozzi. I am also a yahoo shareholder who lost lot of money. I think the board and bankers should do the negotiations

[John from California]

Thanks for the article. Great advice for them. I don't think the deal with Microsoft will get done soon. Ballmer has too much ego to give in now. Like you predicted in the other article, Yahoo is alaready being distracted. I hear the execs are going to be traveling to all the offices to reassure employees to stay. Not a good sign. I think you hit Ballmer's strategy right on the head in the other article. Now it is time for Jerry to listen.

[WAKEUP]

Jerry Yang IS Yahoo. If / when he leaves, there will be no Yahoo.

[PMK]

Great article. I bet your wife is a beautiful, wonderful woman whom you love very much. But, hey, if you can't joke about the old ball and chain???
As a Yahoo stockholder, I feel like I have been beaten with a bat. At times, I have been pulled in two different directions. One, just wanting the buyout to be done and over with. The other, cheering for Yahoo to stay independent.
The question I have had since bought the stock is why they are not more competitive with Google. I can't believe that Google engineers are that much smarter than those of Yahoo. Maybe you can write another humerous article and explain it. Remember, most of us are like your wife, and want it simple.
I go to Yahoo Finance everyday and then to TDWaterhouse to trade. Is there some reason that a purchase of a brokerage cannot be made. I would change my four accounts if the commissions were competitive.

[User 190816]

other side of the coin - MSFT has no business going after yahoo-like companies. just look at its income statement for the clues (5 % of rev, neg op inc)

[Apple Heavy]

Jerry did the right thing.
This issue should not be about Wall Street banks, Investment Brokers and short term traders making some money.
Let me ask this question; if Microsoft had bought Apple back in 1997 and some people thought it did, would Apple be the company it is today?

YAHOO is a company many admire and should remain independent or merge with a company with a similar culture. Just like Apple and Next.

[John from California]

Apple - Yahoo made it about wall Street, the brokers et al when they agreed to discuss a sale and start negotiations. When you are a public company, its about the shareholders. There is nobody at Yahoo who is anywhere close to being the visionary or leader or strategic thinker that Steve Jobs is.

[Mingtzer]

This is a great article with visions and some comments are really good either. I hope Jerry and David have a chance to read them and realize Yahoo!'s unique position in this market, to cut out the fat, stay focused, take best care of existing customers, and strengthen itself. I can't imagine a Yahoo! without Jerry and David.

Most of us have no clue what exactly happened on last Saturday at Seattle. My view of it is this - A fox or monkey "interviewed" two little lambs - hey why don't you boys come to Seattle and let's make a sweet deal? So came the two little lambs. To the little lambs's surprize, there was no sweet deal on the table; and to the fox surprize, there were two cubs of tiger. So the fox wanted to kill the cubs and called off the deal...

Steve is one of the tech world old gods while Jerry and David are dot com era pioneers. Their views of valuations and business operations are simply in different categories and it takes a pragadim shift to realize and appreciate the differences.

Had the YHOO plunged into mid-teen as some analysts predicted on the following Monday, Jerry and David would be dead by now. Steve was a crown at the beginning and evil at the end. From my recent experience to install Ubuntu and Vista, it was like a breeze to install Ubuntu - faster and smoothier. I was told Vista has a potential issue to tie the licsence with your machine's hardware configurations. So if one day you upgrades your PC and try to reinstall Vista for any reason, it will assume you'll install it a 2nd time and require you another licsence. Or you have to call MSFT to resolve it. Great! Internet is becoming a computer and we, the people - users, are just a star, as long as the connection is robust, that's the most important part of this social networking comupter, so the OS and software in a PC will become simpler and more reliable. Unfortunately, MSFT continues to rollout more and more cmplicated and expensive Windows for the general public. Who wants to keep changing the Windows from version to version and buy a newer PC every few years? It is totally unnecessary. If MSFT can't transform itself, their market share will start to shrink in the near future.

For those YHOO stockholders, don't forget the fact that it's a GROWTH stock. It could be at $100 mark if done right in two years or could be at $10 and going down the drain. I would give Jerry and David my full trust (after all I don't have that much to lose) and when I don't, I would simply buy the bullet and take the loss. After all it's us who make our own choices. No need to complain.

Jerry and David, cut the fat, stay focused and keep you visions alive. Learn the lessons from AAPL and GOOG. Yahoo!!

[blah-blah]

Just who here thinks YHOO has anything remotely resembling a wide moat or a competetive edge? If nothing else Yang has embodied what is wrong with the company - hubris and ego does not make a good combination.

Why put your money behind this fool when so many better options exist? (it is money after all)

[George R]

This was as good of an article as I have read in months, Tim. Thank you very much. I totally agree with practically everything you said.

I will elaborate on one particular thing you said, however. I firmly believe this "deal" may signal the end of Wall Street as we have known it for the past ten years or so. In my view, that would be wonderful news. Those "fat cats" are simply not able to "fix" technology deals like they used to ... as they do everything else.

They are simply not smart enough these days. People are sick and tired of their greedy ways.

The rocket scientists in the valley and in Redmond blow them away. Where would YOU rather work if given a choice?

Anyway, Yahoo is a "terrific" brand. They are in the top five in Sports, Jobs, Health, News, E-mail, Search, Photos, Small Business, local Newspapers and Directories, and many more areas too varied to mention.

People do not like Microsoft and do not in general see them representing true innovation. That will not get better under Ballmer in my view.

And probably even more important in the long run, people have finally noticed some of the "gray-line" business practices, infringment activities, and corporate ethics out there at Google.

They have preyed on people's apparent ignorance (or at least what
Google perceives as ignorance) for far too many years already.

If the Yahoo folks would simply put their collective heads down and start to work for their shareholders for a change (rather than seeming to be continously in a "scramble"), the results might surprise everyone. Even themselves!

What's wrong with organic growth and profits when you're in so many strong related markets, several of which could become the next Microsoft or Google "killer app"?

Thanks for writing this one, Tim!

George

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