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George Liu
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George is a columnist, investor, and economist. He has written for Seeking Alpha, The Motley Fool, Investing.com, Psychology Today and his works have been featured on Seeking Alpha's Wall Street Breakfast, MSN Money, Yahoo! Finance, AOL DailyFinance, CNNMoney, CNBC, MarketWatch, TheStreet,... More
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  • Yahoo: In For The Long Run 0 comments
    Jan 9, 2012 3:41 PM | about stocks: YHOO, NFLX, ALBCF, ALBIY, WBMD, CMCSA, HSII

    On Friday, Yahoo Yahoo! Inc. (YHOO) hired executive search firm Heidrick & Struggles International (HSII) to smooth out a corporate-level transition; Yahoo is searching for new Board of Director candidates to replace existing Directors such as Chairman Roy Bostock. This comes on the heels of recent announcements that named PayPal President Scott Thompson as the CEO of this dwindling Internet conglomerate. These recent shakeups at corporate continue to instill an aura of wariness in investors because of two main reasons:

    • Yahoo isn't looking to be bought out, which has disappointed investors that have bought into Yahoo seeking a potential premium if the company is acquired. Rampant takeover rumors of Yahoo have been circulating around the investment community for months, but the hiring of Heidrick & Struggles International and naming of Scott Thompson as CEO shows Yahoo's intentions to stay and buckle in for the long run. In fact, with Scott Thompson on board as CEO, the potential for Yahoo buying out other companies has increased, especially if Yahoo is able to gain significant revenue from a tax efficient asset swap of its Asian assets. As Piper Jaffray analyst Gene Munster notes, Scott Thompson's comments suggest a need for the company to expand its offerings, which could potentially translate into a buyout of companies such as Netflix (NFLX) and Hulu, as video continues to remain one of the weakest links in the company's content offerings
    • Scott Thompson, as Jefferies analyst Youssef Squali and anonymous startup board members have noted, does not have experience in the necessary fields that will benefit Yahoo. Squali notes that Thompson has little media expertise or experience turning companies around, while the startup board members are puzzled by his "lack of consumer web and monetization experience." Squali subsequently downgraded Yahoo to HOLD after its announcement. Even Yahoo management is skeptical of Thompson's abilities; An anonymous Yahoo exec interviewed by Business Insider believed the replacement to be inadequate, noting they need an "animal" to turn the company around.

    In fact, shareholders are believed to be so discontented with Yahoo management that The Wall Street Journal anticipates a potential shareholder proxy war led by Third Point's Dan Loeb. Yahoo's hiring of Heidrick & Struggles International can be seen as a potential compromise move to placate shareholders; the resignation/firing of Chairman Roy Bostock would fulfill Dan Loeb's request that Roy Bostock be removed from Yahoo's Board of Directors.    

     With that said, Thompson appears to be receptive to Yahoo's strategy to rebrand itself to emphasize its content and media, which is rolling along quite nicely. This transition shows Yahoo's determination to buckle in for the long run and reposition itself as a leader in the technology/media sector. Yahoo recently announced a flurry of activities dedicated to promoting its partnership with Sundance Film Festival and its streaming of 12 of its shorts. Yahoo has also streamed movies and recently redesigned its video hub in an effort to revamp its image into a center that offers "premium" entertainment. A potential tax efficient asset swap of Yahoo's Asian assets, such as its valuable holdings in Alibaba (OTC:ALBCF) could net $17 billion for Yahoo, which, as noted before, would provide much-needed ammunition for a potential acquisition and a catalyst for Yahoo's stock price. An alternative would be Yahoo requesting a direct acquisition of companies as part of the swap instead of cash; according to Bloomberg, Yahoo is currently looking at WebMD Health Corp (WBMD) and the Weather Channel, which is partially owned by Comcast (CMCSA). It will be interesting to see what assets Thompson selects to be included in the tax efficient asset swap (or whether he includes any at all), as this decision could be a very good indicator of Yahoo's future strategies under Thompson.

     

    It also should be noted that there were some bright spots in Yahoo's F4Q earnings report. 4Q EPS for Yahoo increased 31% compared to the same quarter EPS of last year. The 4Q earnings report also came in 23.5% above analyst estimates and the average EPS growth of the last 3 quarters amounted to a progressive 23%. Overall, Yahoo's 3-Year EPS growth rate is 12%. However, even though earnings looked solid, sales have taken a significant hit. 2011 4Q sales fell 24% year over year while the 3-Year Sales growth rate is -9%. Yahoo aims to change this with its aforementioned strategy, which has already shown some positive signs. However, Yahoo's profitability is small, with a low annual ROE of 8% and an annual Pre-Tax Margin of 13.2%



    Yes, there are considerable obstacles for Yahoo and its business strategies, but there's no better time for Yahoo to embark on its road to recovery than now. I would advise, at least for the moment, waiting on the sidelines for developments to come in concerning the management status of the company and the status of Yahoo's Asian assets before deciding whether or not to invest in Yahoo. 


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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