Marissa Mayer Yahoo

What would you do if $10 billion in cash landed in your company’s lap? If you were Marissa Mayer, CEO of Yahoo, you’d be spending a lot of time fending off inane suggestions for how to use the money, most of them involving a slew of acquisitions (or one very sizable one). But NYU professor NYU Aswath Damodaran might actually have an idea worth listening to (outside of our own).

Damodaran’s idea is predicated on two things: his carefully reasoned valuation of Yahoo, which he estimates is worth more broken up into pieces. (The instrinsic value of Yahoo’s equity is $46.13 per share, he says, although the company is trading at $34 and change.) The second assumption: the obvious fact that, in his words, “Yahoo has lost the fight to Google and should concede gracefully.”

Marissa Mayer Yahoo

Yahoo CEO Marissa Mayer

So what does Damodaran suggest? Ignore the calls to “do something quickly” with the projected capital gain from the sale of a stake in Alibaba, for one. In addition, Damodaran counsels to avoid throwing good money after bad by investing in Yahoo’s core business. Instead, Yahoo should curtail growth investments and run “itself as a mature business,” muddling along “as a mature company with stagnant revenues and stable margins,” he says. So why, then, would Yahoo be worth $46.13 a share? Obviously, due to its stakes in Yahoo Japan and Alibaba.

To get the stock higher, Mayer needs to get her finance team to “work on making the performance and the pricing of [Yahoo’s] cross holdings more transparent to investors.” As Damodaran discovers in trying to value Yahoo, neither the holding in Yahoo Japan nor the one in Alibaba is consolidated, so they don’t show up in Yahoo’s operating numbers. More transparency would shrink the gap between Yahoo’s market price and its break-up value.

Certainly, Damodaran’s advice is a lot more reasoned and his idea a lot less risky than others that have been floated, such as to buy AOL, “another once-dominant Internet company that was outwitted by hard-charging innovators such as Google and Facebook” or, as a New York Magazine column offered, turn Yahoo into some kind of venture capital firm:

 “With $10 billion or more, Yahoo could buy stakes in health-care start-ups, financial start-ups, transportation start-ups — any start-ups, really, whether or not they’re related to Yahoo’s existing business lines at all. Yahoo wouldn’t need to manage these companies or direct their strategies. … If Yahoo approached a few dozen innovative start-ups — probably foreign ones — and waved hefty term sheets in front of them, it might just work.”

(Never mind that the risk premium shareholders would demand would skyrocket, and countless other problems with such a business model.)

Although we like Professor Damodaran’s ideas, we think Yahoo shareholders would eventually get bored and vote with their feet. If Alibaba is so valuable, why not just hold that stock directly? We also think, as he astutely points out, that in the long run “Alibaba may be uncomfortable with Yahoo’s continued large stock ownership and find a way, legal or extralegal, to get Yahoo to sell.” Oops, there goes half of Yahoo’s value.

So what other paths are available to Mayer? Here are two more, since everyone seems to have an idea: one, put Yahoo on the block again. Pretty soon, whether initiated by Yahoo or not, someone with deep pockets is going to take advantage of Damodaran’s valuation numbers and the company’s escalating cash holdings — they will buy Yahoo and sell it off in pieces, thereby realizing the breakup value. Why not be proactive and try to get the best price before some hostile investor takes a proposal directly to shareholders?

The second idea is to use the cash to make a big bet (sorry, we couldn’t resist). The kind of acquisition we envision has worked for other companies, particularly, as we chronicled earlier this year, for Bloomsbury Publishing: buy a low-risk, profitable business or businesses with a steady stream of revenue. Bloomsbury cashed in its winnings from the Harry Potter series to “acquire 20 different businesses, almost all of them in academic and professional publishing,” as Bloomsbury’s CFO told reporter Marielle Segarra. In those markets, “you can publish a book and have it last for four or five years. And if you find a set of professors who adopt your books, you can have a very good business,” he said.

Opinion_Bug7What would be the equivalent action for Yahoo? There’s the rub. There are very few low-risk, sustainable cash cows in high tech anymore, if there ever were. One possibility, though, is for Yahoo to use its cash for a move into the enterprise market. Why not buy a company like Box, which recently partnered with General Electric to provide its employees cloud-based file storage and management (and is most assuredly entertaining merger offers now that it has filed for an IPO)? It would be a bold move, for sure, and who knows if Yahoo has the chops to compete in business-to-business markets. In addition, Yahoo would just be opening a new front in the battle with Google, a war it long ago lost.

Therefore, we think choice number one is the way Mayer should go. Of course, it’s not realistic to expect a CEO to voluntarily liquidate a business that has a $4 billion revenue stream and very little debt. So we don’t expect to be taken seriously. But there are many crazier ideas out there, and on a purely financial basis, it sounds like the best for shareholders.

Photo: Wikimedia Commons, Mrgadget3000, CC-BY-SA-2.0-DE

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24 responses to “Yahoo, Sell Thyself”

    • That is the most “uneducated” comment i’ve read. You mean to say all teachers and professors are dumb? Not that you have any intellectual capability to understand this…but, there are still people who take up teaching because it’s a greater profession. It’s a giving profession. You and your comment are a classic example of what an educated illiterate is like. Go back to playing ping pong with your virtual friends. Loser!

    • Yahoo should strategically (planned financially by experts) sell a portion of its stake in Alibaba (never the whole; never) & use the revenue to buy Apple,Google & Facebook shares! Alternatively, Mr. W. Buffett should be brought in as an advisory member to the board towards investment options. The latter move has never failed in the last half century & more.

      P.S. – Buying MicroSoft shares would also not be half bad an idea. Their cloud business is exciting & they obviously have interesting future plans with the Nokia acquisition.

    • well hello friends . as per my view yahoo is going one more step down . actully no body relize it that after join marrisa mayer yahoo is going down and down step by step and its just happend becuse of we got a ceo like marrisa mayer . it will started when yahoo shut down their lots of services included yahoo public chat room. on dec 14 2012 . some body told me how the company goes up if they dont have people to use company services . yea i mean85 % percetn people using yahoo public chat room . and suddenly marrisa shut down public chat rooms . becuse she want to make yahoo better but she didnt know about that decision take yahoo to go down . You guys tell me if suddenly u user 65 percent people stop using u company services how the company shares and company make money and going up marrisa mayer put yahoo on trouble . becuse millions and millions fans all over the world request her to reopen the chat rooms but she didnt here yahoo fans request becuse she is proudy selfish and Earless women . she started ignored yahoo fans and now yahoo fans started ignoed her and yahoo company . and thats the fact and at the end of the marrisa mayer story in yahoo comapany yahoo bord director and yahoo owners got nothing than empity hand and than they relize what they done to their to appoint marrisa mayer as a yahoo CEO . becuse yahoo lose their top class engineers . top enginners left their jobs in yahoo . becuse they did not like the way marrisa waking and deal with them . yahoo have lost their inverstors . becuse of marrisa mayer . so beware yahoo owners and bored of director marrisa is come to distroyed yahoo .And u guys yahoo is never alone becuse millions and millions people always in the chat room rooms are nevere empity . and now we all yahoo user Hate marrisa And yahoo buttom of our heart . thats the buttom line from kuldeep singh

    • well said Aharon!!!
      I now also understand what the logic of the Nokia board must have been when they hired Stephen Elop!!!

  1. Gentlemen, there’s absolutely nothing wrong with diversification and partnership. There’s clearly a lack of strategic innovation at Yahoo compared to the other players. However, their mainstream of services shouldn’t deviate from the other key players in the industry (i.e., Google, AOL, MSN, etc.). Even Facebook is smart enough to buy out What’s App (before Yahoo). There are a lot of different acquisitions that may still align with Yahoo’s mission, but research and homework is needed.
    I disagree with Prof Damodaran’s idea of how Yahoo should transform itself entirely. That’s no different from asking P&G to go solely into pharmaceuticals. It doesn’t make sense. From a monetary perspective, it does. However, if you’re looking at a brand strategy perspective, there isn’t much to lean on. It becomes a Berkshire Hathaway (which there isn’t anything wrong with converting Yahoo into a cash cow).

    • One thing I need to say is that Professor Damodaran has a very long post on this and you should really read through it to understand where he is coming from Certainly, yes, he is a professor and a valuation expert, and not a CFO or CEO, so he might have a little bit more focus is on what is attractive according to the corporate finance textbook. But, it really is hard to find rays of hope for Yahoo, unless I am missing something. As numerous stories have pointed out, and you point out Jay Zee, they need a clearly articulated vision. There’s a danger on pinning your hopes on acquisitions. I think so far they have avoided that, but the pressure must be building for Mayer. I just don’t know if there is a CEO who can salvage this company AND keep it intact. The Alibaba holdings seem like a distraction more than anything, but, as I said, get rid of that entirely and what happens to Yahoo proper’s market value? Interested to hear your further thoughts.

      • @VincentRyan
        Hi Vincent,
        I managed to have an opportunity to review the evaluation Prof Damodaran provided. Again, it does provide the breakdown by region, but it isn’t comprehensive from a brand strategy perspective. However, as a CFO, I would certainly look at each BU to assess the profitability as well as desirability (for acquisition). One thing with the hi-tech sector is that the demand changes so quickly from one day to the next; yahoo messenger was the main communication tool and the next day everything shifts away.
        As for Alibaba, it does share the same “values” from a commoditization standpoint so it has always been very desirable from Yahoo’s perspective. Again, what the organization needs is a more decentralized management structure to be able to afford seizing lucrative opportunities and valuations out there. It needs to build on its M&A team to be smarter than Google and they will need strategy for that (not just numbers). Acquisitions come in stride and it’s a cycle where it’s either feast or famine. Sooner or later, Yahoo will need an integration with a much larger player like Amazon in order to “beat” the competition, but keep in mind that if the industry is already bloodied then it needs to evolve to recreate new space and branding for itself.

        • @VincentRyan

          In addition, here’s the citation from page 51 of the latest 10-Q for your readings (as well as for Prof Damodaran):

          “Our business depends on a strong brand, and failing to maintain or enhance the Yahoo brands in a cost-effective manner could harm our operating results.

          Maintaining and enhancing our brands is an important aspect of our efforts to attract and expand our user, advertiser, and Affiliate base. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in certain portions of the Internet market. Maintaining and enhancing our brands will depend largely on our ability to provide high-quality, innovative products and services, which we might not do successfully. We have spent and expect to spend considerable money and resources on the establishment and maintenance of our brands, as well as advertising, marketing, and other brand-building efforts to preserve and enhance consumer awareness of our brands. Our brands may be negatively impacted by a number of factors such as service outages, product malfunctions, data protection and security issues, exploitation of our trademarks by others without permission, and poor presentation or integration of our search marketing offerings by Affiliates on their sites or in their software and services.

          Further, while we attempt to ensure that the quality of our brands is maintained by our licensees, our licensees might take actions that could impair the value of our brands, our proprietary rights, or the reputation of our products and media properties. If we are unable to maintain or enhance our brands in a cost-effective manner, or if we incur excessive expenses in these efforts, our business, operating results and financial condition could be harmed.”

          I would personally advise that Ms. Mayer needs to continue to focus and grow its strengths, which are driven through the current Asian brand and continue building partnerships with particular vendors for automating its payment platform in order to capitalize on licensee users (i.e., Google, Microsoft, etc.).

  2. Also, I believe that Yahoo’s vision needs to be better articulated through the executive team and it needs to operate on a much broader matrix type organization to better capitalize on the opportunities. There’s a bottleneck somewhere within the management structure, hence, missed opportunities. Yahoo of all companies should understand that business intelligence = $.

  3. I had been through all the evaluation of Yahoo! by Prof. Damodaran, and I guess this is what all consulting firms do, and this is what they are trained for. I agree that his calculations are absolutely correct, but what he can’t calculate is its future strategies and results out of it. Marissa Mayer was among top 20 engineers in Google and she was on her desk on 14th day after giving birth to baby in her tenure in Yahoo. So I’m much optimistic about the CEO’s future strategy ,leadership and diligence rather than such fault finding exercise.

  4. If I remember correctly, during the days of Carol Bartz Yahoo already tried the approach to project itself as non-tech company and more as Publishing and Media company which was the failure later on.
    I feel by keeping your core strength in mind like Apple, Yahoo also should concentrate on their core business of technology as well as keeping looking to acquire new startups out side USA i.e. in countries like India.
    Bottom like is to come up with revolutionary product which can hit market like FB, Linked and Twitter did before and to get that revolutionary product you have to continue with R&D and keep developing the new products.
    Acquiring Startup is again a kind of acquiring already successful/established R&D and keep buying products.

    You never know which can hit market when.

  5. Does no one sense the sarcasm in Professor’s speech? He is obviously denouncing the decision that Yahoo took. Buying Flickr and grounding it was one of the major mistakes Yahoo made back then and now selling an established company, granted it was losing ground but at their stature, buying and selling at that level could be a game changer that could either way, should they have made such a decision at this point of time? Someone knows better or thinks so. R&D is the name of the game.

  6. Yahoo has always reminded me of the Baby Boomer dad who’s always been afraid of social networking, recently caved and only just discovered candy crush and vines. Over-acting with little to no understanding of the unwritten rules that have been etched over time.

    The issue here is not the purchase and management of these services but rather an ill advised refusal to let them grow as the individuals, the strong and unique individuals they were.

    Yahoo has decided the best way to go is present itself and its acquisitions as one big “package”. So, like an insecure mom who projects her hopes and dreams on her kids, she encapsulates the flames of new startups and instead of kindling them, promptly snuffs them out.

  7. someone asked: “what you you do?” wasn’t to me, but let me take a stab:

    to start i would overhaul my search engine. this is paramount and all other problems ought to come after it. it is awful compared to the competitors and is going to look worse when china gets involved with the english world.

    speaking of china, yahoo already has half a leg in the door in china, there is a $***-ton more to be made where that came from. get aggressive!

    here are a few more

    fantasy sports and yahoo sports in general draw gazillions to yahoo daily – and it (the sports pages) is all terrible. it didnt used to be, but yahoo has been hellbent on making changes for the worst. ask almost any 30-50 yr. old who visits yahoo sports if they think it has gotten better or worse or stayed the same over the past 10+ years. those ppl/browsers came there from the early years but they are leaving. a lot of them, according to yahoo stats. like i said, many are in the 30-50 range. sounds like spenders to me. worst viewers to lose. see it and do something about it. think women aren’t affected by the homepage the husband sets (like it or not check out the research)? now you are losing two…

    here is another one: stop with the sensationalized headlines (“the most incredible***”…”the most unbelievable…”) you attract the couch sitting weirdos and you scare away the money spenders. advertisers know it and see it when they peruse the stats. it seems like it is directed at women, though not entirely of course. yet, as noted, yahoo is losing spending men in droves. oh, and on that, yahoo has tried to make everything more click-needed to both increase “click” stats and “time” stats. great idea except that it will, in the long run, just infuriate people and encourage them to leave. facebook will eventually have this same problem-book it.

    finally, how about fixing that email service? i dont use it, but i have heard a lot of stories of people that have left it (the email, and subsequently yahoo). that can’t be good, because outside of net searching email is ‘it’ (sports being the next in line i suppose- with yahoo having a seemingly fantasy monopoly in NA until recently…which again, made a lot of households bookmark yahoo/use yahoo as the default page…”times, they are a changin”).

    the three pillars to yahoo all going to poo while they combat those losses with sensationalized headlines and an awkward browsing experience in email services and sports/games….

    sounds like a recipe alright; for disaster…

  8. This is great news for startups & it will be great for yahoo as well because it already has alibaba type business & some more ecommerce will add a great value to this.

  9. Um, I have been saying, what you attribute to Damodaran, for well over a year. CFO dig deeper … dipping into the NYU well …. pfffff

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