Tuesday, August 2, 2016

Yahoo Tosses in the Towel

It's been about two years since Yahoo board members and CEO Marissa Mayer huddled among themselves time and again to decide what to do with the company. Few companies, including many of its competitors all along the Silicon Valley corridor, have endured as many volatile ups and downs in its two-decade history. Yahoo's earnings, revenues and its strategic direction have bounced around like balls in an aimless path.

Mayer was hired from Google to become the CEO who would devise the strategic, pick the people, make the acquisitions, and develop the products that would thrust the company into the elites among technology companies that depend on digital advertising.  Mayer was supposed to push Yahoo to seize once again its top perch among Internet "portal" companies.
Somewhere along the way, Yahoo stepped into a blockbuster of good fortune from having invested in Alibaba, the big Chinese company that combines the best of PayPal, eBay and Amazon and issued its equity over here.  Yet Yahoo stumbled a few times. It picked itself up, stumbled again, and reached a point of not being sure what that best next step should be--except to separate the company into its Alibaba parts and its website parts and let another big company, with resources enough to take risks with it, decide what that next strategy should be.

Verizon has decided to purchase the non-Alibaba parts of Yahoo for a mere $4.8 billion. (Yahoo could have sold itself to Microsoft years ago for nearly 10-times that amount.) Verizon decided to find a partner for AOL, which Verizon acquired within the past year.  Put AOL and Yahoo together, take advantage of their millions of subscribers and tens of millions of clicks, coordinate the content they both pour through websites, reduce duplicate expenses, and make gobs of money from digital advertising.

Yahoo was not on the verge of bankruptcy or insolvency. Revenues have been flat, and earnings exist, although losses are occasional.  Mayer staged many acquisitions (Tumblr, for example), but none could help boost revenues much beyond $4 billion/year. Alibaba brought a fortune--tens of billions in unusual earnings and needed cash reserves.  It also brought bothersome levels of tax headaches.  Yahoo had modest levels of debt (to help its acquisition binge and to develop content), but dwindling cash flow meant it had little room to borrow more.

Markets, disappointed and signaling frustration in slipping stock prices, pushed Meyer and the Yahoo board toward a final move. The market, in fact, had valued Yahoo, minus its Alibaba asset, at negative values.

Mayer's rise to a top post Silicon Valley was meteoric, rapid, and not unexpected (from those who had knew her work at Google).  As a woman CEO not yet 45, she was watched, observed, and perhaps over-analyzed. Every quarterly earnings announcement (or quarterly misstep) and every large-scale, over-priced acquisition were headlined, heralded, or overly analyzed. When the desired revenue growth never appeared, her strategies were second-guessed. It's unfortunate the Verizon acquisition reduces women CEO's in Silicon Valley by one--a worrisome number in a corporate sector where women CEO's can tallied by less than two hands.

No matter what Mayer attempted, the company couldn't rocket itself to where it wanted to be, even if it head years of a head start before the Googles and Facebooks were household names.  Sales were stagnant at below $5 billion. No matter what it acquired, developed, and created, operating revenues (excluding anything related to Alibaba) never topped that $5 billion lid. Earnings and cash flow were erratic (They were losses and deficits last year).  The company spent and spent (development, administrative, and traffic-acquisition expenses), but revenue growth didn't accompany the spending sprees. Debt levels were moderate (less than $2 billion), but would have become a difficult burden if losses continued.

In the eyes of a potential acquirer, Yahoo offered some form of equity value, measured not by growing flows of operating cash, but from the metrics that technology companies with digital-advertising business crave:  subscribers, views, and clicks from a predictable core.

Just as it reasoned with AOL, Verizon likely rationalized that $4 billion and change is not an outrageous price to pay for a company that attracts enough eyeballs daily to generate a base level of $4 billion in revenues. It also likely concluded it could erase much of the billions in Yahoo expenses within a year and eliminate its debt without a flinch. Verizon may quickly turn something that is lackluster breakeven operation into something cash-flow positive. 

The challenges, however, will be (a) how to increase revenues to justify the acquisition, (b) how to mesh Yahoo's operation with that of AOL, which had its own set of financial woes, and (c) how to respond to regulators who might all of a sudden express concern about Verizon amassing enormous amounts of customer information from its combined Verizon-AOL-Yahoo data bases in its efforts to sell the most-targeted form of digital ads.

Tracy Williams

See also: 

CFN:  Verion Acquires Vodafone, 2013
CFN: Why is Dell Going Private? 2013
CFN:  Verizon Rescues AOL, 2015
CFN:  Will Yahoo Ever Rebound? 2015
CFN:  Who Calls the Shots in Silicon Valley? 2016

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