I’ve learned to become more diplomatic over the, well, months that I’ve started pontificating quite loudly on this blog. But sometimes, diplomacy does not yield results.
I’ve been a Yahoo! shareholder since 2003. In April 2003, Yahoo! ushered in a new era of web prosperity: CEO Terry Semel announced Q1 2003 earnings, the stock was up some 15%. Everyone felt good about themselves. I bought in immediately afterwards, because I could see that Yahoo! - as an industry leader - should outperform the market.
Roughly three years after that day, I was tinkering with the notion of selling my holdings after a mere 5% gain, frankly, because in investing, you buy on rumor and sell on news, supposement.
And… the fact is that Yahoo!’s stock was up some 30% year-to-date because Panama was out and it was going to cure polio. Of course, anyone will tell you that for a company with +$5B in sales - of which most come from display/banner ads - even an increase in search sales would not move the stock.
For the stock to move, Yahoo! would have had to hit earnings and up the guidance. There was little chance of Mr. Semel doing that, frankly, because he’s made more than enough promises (via PaidContent: “pick a promise, any promise”), and adding one more to the plate would be suicide. I am not in the camp that thinks Semel is the supreme savior that he was seen to be in 2003 nor am I in the camp that thinks he is the reincarnation of the devil for Yahoo! losing a step to Google. He gets media. I don’t doubt that. Does he get the Web as well. Probably not. Is that a crime. Nope. I think he started using email when he joined Yahoo! Are we going to hang him for that? No.
A Dumb Move That Haunts Yahoo! Today
Yahoo!’s woes date back to the decision to allow Google to power its search. That was an idiotic move. In fact, it was more idiotic then to allow for that than it is now for Yahoo! wanting to maintain its own search strategy when Google is clearly the search monetization leader… but that does not mean, long term, that Yahoo! should yield its search ads to Google, like some have suggested. Long term, it certainly helps to have a proprietary search algorithm and paid results database.
A Very Public Problem
The problem, frankly, is that Yahoo! is a publicly traded company and shareholders are impatient. Yahoo! remains the best positioned firm to win in display/banner ads, and that is why Google overpaid and bought DCLK for $3.1B.
Investors, of course, do not care about that. They care about immediate results. And frankly, judging by the near 10% meltdown in Yahoo!’s stock, yesterday, Terry Semel and CFO Sue Decker let one rip, everyone in the room heard it, and while everyone was probably being polite at the time, today the word is out that Yahoo! stinks. Again, Yahoo! does not stink at all, it’s a great company in many ways, the perception is that Yahoo! has major problems.
So, sometimes, it’s not you, it’s the environment.
Yahoo! has many options, it remains one of the best media and tech assets out there, but something needs to give, the stock is not moving, and as a publicly traded firm, that is a problem. We practically had a party when the stock crossed $30.
What are Yahoo!’s Options?
1. Status Quo
1.1. Not Make Any Big Acquisitions
Boring. Does that seem to be working? Though Henry “Da Bull” Blodget seems to argue that the best is yet to come.
1.2. Buy Facebook
Facebook is growing quickly, it is making many smart moves, like allowing others to add widgets, which will win over even more users from MySpace. I see major integration and culture issues with Mark Z., and have argued that Facebook is now on pace for an IPO. Furthermore, since Mark Z. turned down YHOO’s $1.6B deal, do you really think that Facebook will not ask for anything less than $2B. Peter Thiel argues that Facebook is worth $8B. He’s obviously not serious. Is he?
2. AOL.com
We keep hearing rumors, but this one does not make sense. Google paid $1B for 5% and won’t let this happen. Neither MSFT nor YHOO will buy AOL. Why not? Google. Let’s move on.
3. MSFT/YHOO Tie Up?
What I hope to see, frankly, is for Yahoo! and Microsoft to explore working together in one way or another. I previously argued that there was merit for MSFT to get out of the Web business directly and spin off MSN/Live.com into Yahoo!, that would give it 40% of the new entity. Today, post Yahoo!’s 10% skid, it would own 45-50%. I understand that means that egos would be bruised, and there are technical issues with integration.
Accoding to comScore, Google Sites led the pack with 3.5 billion search queries performed, followed by Yahoo Sites (2.0 billion), Microsoft Sites (798 million), that means that MSFT+YHOO could actually come close to GOOG’s share, which is nothing to sneeze at.
All I know is that Google has what Yahoo! does not, a much stronger currency in a cash machine and a higher stock. Google will simply dilute its stock or spend the cash it brings in to scoop up many more companies, meaning that the gap between it and Yahoo! will amplify.
4. Merge with Viacom
This one is not that ridiculous.
First’s thing first, the tale of the tape: according to Google Finance, Viacom’s got a market capitalization of $27 billion while Yahoo! is worth some $38 billion, so it would not really be an acquisition, rather, it would be a merger of equals.
The problem, really, is that Yahoo! is not in the content business, while Viacom is. While Yahoo! has some content initiatives, the company is largely a distribution play. Incidentally, Viacom has numerous distribution channels offline, so maybe a combined company would be a distribution powerhouse.
But the real problem lies in the fact that Yahoo! has autonomy to work with any media company, including Viacom’s competitors. Yahoo! has advertising relationships with the largest Fortune 500 companies including the big media firms… with Viacom as its new sibling, that would probably change to some extent.
I am sure that Terry Semel could do wonders for Viacom’s Paramount, but the simple fact is that Yahoo!’s culture is too large and too unique for it to be molded into Viacom. The odd thing is that after the split from CBS, Yahoo has 9,800 employees while Viacom has 9,200 (according to Google Finance).
5. Go Private
The other alternative, frankly, is for Yahoo! to consider going private. I also covered this some time ago, arguing that Yahoo! would actually probably triple in value in three years. DCLK tripled in value in two years. Om Malik points out correctly that:
In the two years before Google went public, its stock rallied 376% to $28.61 from $6.01. As of Tuesday, before Yahoo’s first quarter 2007 report, it had risen another 12% to $32.09.
That’s partly because, before Google IPO, investors had nowhere else to put their money than Yahoo. Then came Google, who knew better than Yahoo how to make ad money off search results
I still want to believe that YHOO should be a core holding of any portfolio, it is the most diversified Internet company (yes, even with Googleclick).
But sometimes I wonder: should YHOO really be public?
Think of this revealing comment by an analyst:
“You had so much hype and optimism about Panama around the quarter,” said Douglas Anmuth, an analyst with Lehman Brothers. Mr. Anmuth said Panama seemed to be on track to deliver on its promise. “It is going to be on a schedule that Yahoo suggested and not on what investors had come to expect in the last few months,” he said.
I asked Brad Feld, a VC, about my suggestion that the biggest losers of the DCLK deal were public shareholders, he said: “I recall that DoubleClick was stagnant for a long time as a public company - both in terms of business performance and stock price. The board and major investors clearly thought cashing out through a take private transaction was the right thing to do at the time. You can’t revisit the past.”
Fair enough, so looking ahead, what would you do if you were in charge of YHOO?
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