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Marissa Mayer's Playbook for Turning Around Yahoo!

Stocks in this article: YHOO MSFT GOOG

NEW YORK ( TheStreet) -- The last interesting thing that Yahoo! (YHOO) did was to buy Flickr (for $35 million, as I recall -- that ain't $1 billion in Zuck bucks, which is what Instagram got from Facebook (FB)).

That deal happened in March 2005.

Yes, for the last seven and a half years, Yahoo! has basically done nothing. CEOs have come and gone, consultants like Boston Consulting Group have come in and made recommendations, all-hands meetings have occurred, promises of doing better have been made.

And yet, in seven and a half years, nothing has happened.

But, here's the kicker: The users just keep showing up every day when Yahoo! hangs up the "Open" site on its Web site. By last count, 700 million folks show up every month. That's not exactly the 955 million monthly average users that Facebook claims, but it's pretty darned close.

So, one of the reasons that shareholders are excited about Marissa Mayer's arrival is that there are pretty good odds that she'll at least do something new. Anything new is better than nothing.

The Internet has been overflowing with bloggers' ideas of exactly what Mayer should do to turn itself around. Some of them have been good; some of them have been boneheaded. I'm sure she's read all of them. (Not!)

Yet, I cannot contain myself and must "chime in" (as Facebook CFO David Ebersman likes to say when encouraging Sheryl Sandberg to also answer a question he's about to answer on an earnings call).

Here's what I think Mayer's got to do to turn the ship around in Sunnyvale:

1. Fire a lot of people. This was one of Marc Andreessen's first suggestions to Marissa after he heard she was hired. He said she should can about 10,000 people.

This actually isn't as radical as it sounds, and Mayer should do it. Prior to Scott Thompson's announcement that he would fire 2,000 people in February, Yahoo! had about 18,000 people working for it if you include all the full-time contractors who were deliberately hired that way in order to make it seem like the headcount reported was smaller than it actually was.

So, after the cuts, you've still got 16,000 people at the company. Taking it down to a true number of 6,000 would still let them do stuff. You would then naturally start to build it back up through acquisitions and natural hiring.

Marissa probably wants to hire lots of talented engineers. However, who (really) hired Marissa? Dan Loeb did. I'm sure he wants to see a bloated organization slimmed down to its best and brightest (which also would happen to magically grow earnings before interest, taxes, depreciation and amortization significantly).

2. Steady as she goes with Alibaba and ensure a deal with Softbank is struck for the Yahoo! Japan stake. It's likely Mayer won't play a big role in the monetization of the Alibaba or Softbank. That's because the talks are probably already well under way. She just needs to ensure they follow through and that the cash proceeds are used to substantially shrink the outstanding shares. Again, it's likely the board will take the lead on that.

3. Breathe new life into core properties. Yahoo! Finance, News, Sports, and OMG are huge in the desktop world. Ensure they get their due in mobile. Turn Flickr into an Instagram killer. Or spin it off to Twitter in exchange for an equity stake and strategic partnership with Twitter.

4. Do some interesting acquisitions that show Yahoo!'s a leader in mobile and cool again. There's not unlimited cash for deals, but there is no shortage of companies out there that would rapidly change the perception of Yahoo! to ultra-cool.

Potential M&A targets should include Yelp (YELP), TripAdvisor (TRIP), Kayak Software (KYAK), Zillow (Z), Pandora (P), StockTwits, WhatsApp, Flipboard, Pulse, Gravity, HomeAway (AWAY), Gilt Group, Martha Stewart (MSLO), OpenTable (OPEN), Path and Pair.

5. Fix the core technology. There are a lot of fingers in the dike that no one sees except Yahoo! engineers. Nevertheless, this needs to be fixed.

6. Take Yahoo! back into search by agreeing to take over Bing from Microsoft (MSFT). This would be the most radical move Mayer could make and would undo Carol Bartz's 2009 decision to outsource search to Microsoft except for the front-end look-and-feel (whatever that means).

This hasn't worked for Yahoo!, and Steve Ballmer isn't happy that Bing is still a sinkhole. Let's take Bing off his hands, along with all the search talent up there and bring them back to Sunnyvale. Then, let's do something with search that out-innovates Google. Let's face it, there's no one better positioned to lead that effort than Marissa. Folks like Yahoo! co-founder David Filo would be up for it -- along with Shashi Seth (who led the efforts in Yahoo! Axis, a mobile search tool that has a lot of promise). Anything is better than the status quo. Plus, I think Mayer would be especially motivated to stick it to Google in search as a final way of reminding Page he screwed up when he left her off his leadership team.

There should be evidence by Thanksgiving that this is a new Yahoo! that is incredibly exciting and positioned to win for the next five years in a way that is distinct from Google (GOOG), Facebook and the rest.

At the time of publication, Jackson was long YHOO.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson

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