As hopeful tech innovators strut their stuff at the annual CES show in Las Vegas this week, Yahoo’s continuing troubles illustrate what can happen to a former tech star that doesn’t stay ahead of the curve.
The talk surrounding Sunnyvale, CA-based Yahoo (NASDAQ: [[ticker:YHOO]]) no longer focuses on how CEO Marissa Mayer can revive the flailing tech giant, founded in 1994, but on the best strategy for dismantling the $30 billion company and preserving as much value as possible for shareholders.
The controversy over those end-game choices boiled over Wednesday as activist investor Starboard Value LP made public a critical letter to Yahoo’s board of directors. Signed by Starboard CEO Jeffrey Smith, the letter calls for a shakeup among Yahoo’s leadership if it doesn’t make quicker choices to sell assets, cut costs, and protect shareholders’ interests.
“To be successful, dramatically different thinking is required, together with significant changes across all aspects of the business starting at the board level, and including executive leadership,” Smith said in the letter.
Yahoo hired Mayer, a former Google executive, in July 2012 to restore the luster to a company that had been out-competed as a search engine by Google, and supplanted as an online home base for consumers by competitors including Facebook and Google, now a unit of the parent company Alphabet.
Mayer (pictured above) has been trying to bolster Yahoo’s core offerings—search, e-mail accounts, news and information services, advertising—as well as boosting the company’s cool factor with moves such as the $1.1 billion acquisition of the popular blogging platform Tumblr in 2013.
Starboard contends that the turnaround isn’t working, though a new leadership team might be able to pull it off. Smith is pushing for a timely spinoff or sale of the core business.
The value of that business is the subject of intense speculation, with some observers guessing it could be worth $5 billion to $8 billion to possible buyers such as Verizon, other media or telecommunications companies, or private equity firms. But there’s general agreement that the bulk of Yahoo’s value is due to its earlier, lucky decision to buy a stake in China’s e-commerce behemoth Alibaba. Yahoo’s shares are now worth more than $30 billion.
Smith claims the market now values Yahoo’s core business at “near zero” without the Alibaba shares. The company’s market cap at Wednesday’s close clocked at $30.37 billion. But Smith conceded that the market valuation may reflect not only some discounting of the core business’s value, but also an expectation that a spinoff or sale of Yahoo’s Alibaba stake might come with a multi-billion-dollar tax bill.
Yahoo had made plans to spin off its Alibaba shares into a holding company, but it suspended that deal last year over uncertainty about the tax consequences.
In any case, Starboard is pressing Yahoo to cut costs. Smith complained that Yahoo has spent more than $2.3 billion on acquisitions since Mayer came on board, and many of the acquired companies have been shut down.
His take may be a bit misleading. In mid-2013, Mashable’s Lauren Indvik noted that Yahoo had made 20 acquisitions a little over a year after Mayer took over. But Indvik said many of those were bought at low prices, and for the main purpose of acquiring talented teams for the existing business, rather than keeping the acquired startups running. (A notable exception was the blog hosting site Tumblr, which continued operations.)
On the other hand, Yahoo just acknowledged that it has shut down one of its own initiatives. The video hub Yahoo Screen, which featured sporting events, video clips, and original television series, is being dismantled, the entertainment publication Variety reported this week. Yahoo Screen was one of a bevy of features Mayer highlighted during an upbeat keynote address at CES in January of 2014.
Despite that bad news, as well as Starboard’s saber-rattling, Yahoo’s share price didn’t take a big hit Wednesday. The shares closed at $32.16, down 0.12 percent—less than the Nasdaq’s drop of 1.14 percent.
As the Wall Street Journal’s Ben Eisen noted, Starboard has been dogging Yahoo with criticisms since 2014, but its blasts have had little immediate effect on trading. Still, back on Jan. 6, 2015, Yahoo shares closed at more than $49. Today’s price reflects a loss of more than a third over the year since.
Late Wednesday, Business Insider reported that Yahoo is planning to reduce its workforce by 10 percent, or around 1,000 staffers. The story cited unnamed sources.
Yahoo’s reorganization may be a slow-rolling affair. Depending on what it chooses to hang onto, it may eventually become a mere shell to hold Alibaba shares, a continuing Internet company selling some, or most, of its business units—or only a notable name in the early history of the Web.
