Former star of tech, Yahoo tries to find its role in a new digital world

Yahoo was originally founded by Stanford students Jerry Yang and David Filo to produce an early web portal giving access to a directory of websites before the advent of search engines like Google, and also to provide bespoke internet content. 

In 2008, Microsoft proposed a $44.6 billion takeover of the company, at $31 a share, a 62% premium, but the deal was never completed after resistance from Yang and others on the board. In early 2012 Yang finally left Yahoo after pressure from activist investor Carl Icahn and today, 4 years after the proposed takeover bid, the stock trades at around $15, half the Microsoft offer. A complete blunder for shareholders! However, in 2009, Yahoo subsequently did a deal to pool its Internet search resources with Microsoft’s Bing, saving it significant development costs.

Yahoo owns valuable stakes in Chinese search engine Alibaba (40% worth at least $14 billion or $11.50 a share) and also a 35% stake in Yahoo Japan (the entity is valued at $19.6 billion giving Yahoo $6.7 billion or $5.5 a share). The company is planning to sell half of its Alibaba stake by October.

Jerry Yang, founder of Yahoo

Yahoo’s primary business proposition was that it was a central portal of content to areas such as Finance, fashion communities or news. However, in recent years, direct web traffic has declined as more and more time is spent on social network sites like FaceBook and also the quality of content has waned.

Yang was succeeded by Carol Bartz in 2009 but, after a series of radical restructuring proposals and disappointing earnings, she was replaced by CFO Tim Morse in 2011 with her sacking announced via an infamous phone call. Morse was then replaced by Scott Thompson who resigned in May over a scandal involving a ‘talked up’ CV (really!). The management team at Yahoo have been accident prone to say the least….

On Monday, Yahoo named ex-Googler Marissa Mayer as CEO in an attempt to rejuvenate the company. Mayer was employee number 20 at Google and is worth an estimated $300 million after gaining from Google’s IPO.

For the  quarter to June 2012, Yahoo’s display ad revenue, excluding traffic acquisition costs of $473 million, rose 1% from the same period in 2011 to $1.1 billion. Internet Search revenue was $385 million and it earned $226 million, or 18 cents a share compared with $237 million the year before. Excluding one-time items, the company earned 27 cents a share compared with estimates of  23-25 cents a share on $1.1 billion in revenue, despite restructuring charges of $129 million for the quarter as the company continues to down size.

The company has $2.4 billion in cash worth $1.8 a share, down 4% versus the previous year. Reduced spending on developing content has helped the company maintain earnings and a 21 percent operating margin despite a competitive advertising environment but its core ad business is cetainly under pressure.

Yahoo’s search deal with Microsoft continues to underperform. Mayer will have plenty to contend with when she starts and not only because her first child is due in October. Yahoo was once the Internet star, a pioneer, but it fell behind, failing to adapt to the new digital world of social networking and advertising platforms such as Google Adwords. She is an engineer so the hope is that she can rejuvenate the technical innovation and bring Internet users back to its sites. A tough challenge…

From a valuation perspective however, with the Alibaba stake sale, the Yahoo Japan business, and plenty of cash, the sum of parts valuation looks compelling compared with the current $15 share price. If Mayer can breathe some life into this dinosaur of a company, things could be interesting indeed..

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Contrarian Investor UK