I have been a shareholder of Yahoo! (YHOO) from 2006 to 2008 and then from December 2010 until today. Combined that’s about 5.5 years that I’ve owned this stock. So you can agree or disagree with my views on Yahoo! that the current management hasn’t been doing a good job and that it should unlock value for shareholders by selling to either Alibaba or SoftBank, but you can’t say I’m short-term oriented.
I was criticized Wednesday in Business Insider by a former Yahoo! employee, Jeff Minich, who worked under Marissa Mayer in ad tech and then decided to quit. By his own admission, “Marissa made decisions and leadership changes related to the premium display business that made it difficult for me to continue working there.”
He goes on to say: “Marissa should have embraced these bright minds and incorporated their expertise and knowledge into her new native ad and mobile vision. She chose not to and Yahoo! display revenue, at least in the short term, suffered as a result.”
But he argues that I am wrong to “attack” her, and that he probably misjudged Mayer’s strategy. Now he thinks she probably made a conscious decision to sacrifice Yahoo!’s legacy display business in favor of a new native advertising revenue stream that will emerge from its ashes in the next one to two quarters.
He points to some metrics in the last Yahoo! earnings report he believes indicate that a turnaround is just around the corner. He argues I’m being short-sighted by wanting to see tax value unlocked in Yahoo! shares and criticizing Mayer.
I’ve been critical of other Yahoo! CEOs in the past. I always disclose my share ownings in any written post. I’ve heard the criticism before by some that I’m biased and just trying to cause a quick pop in the stock with my writing.
If only it was so easy to manipulate the stock price of a $37 billion company! I don’t have that power. I don’t think even Warren Buffett, Carl Icahn or Dan Loeb has that power.
I think of a shareholder as “well-informed” and not biased. Although I believe anyone can have a valid opinion, I tend to pay more attention to the view of a shareholder than a non-shareholder because they have presumably spent some time considering a point of view about a company before parting with their money to buy shares in it.
Shareholders must think there’s some combination of factors that can occur in the future which will cause the stock price to rise. If those people are speaking out about why they’re disappointed in current management’s attempts to unlock that value, I tend to pay attention.
Shareholders are not always right, of course. Every argument’s merits should be considered on its own. But I tend to weight the opinions of a shareholder more than a non-shareholder and will continue to do so.
It’s silly to suggest that being critical is “attacking.” The use of that word implies that it’s unfair and shouldn’t be done. Is that the world we want to live in? Where we have to blindly salute to a CEO without criticism? That’s nonsense. It’s perfectly fair to point out concerns and mistakes. Others are free to discuss these points of view and whether they are correct or not.
You can disagree with my points about Yahoo!, but don’t tell me I don’t have the right to air them or that I’m just trying to manipulate the stock price.
So as to the points of the argument which the ex-Yahoo! employee, Minich, disagreed with, I’d like to respond:
The Tax Efficiency of Selling Yahoo! to Alibaba or SoftBank. Minich seems to believe that if Yahoo! agreed to be acquired for “another 30-40%” higher than the current price, it would be “short-sighted” because “long-term shareholder interests are better served by leaving the company in the hands of Marissa.” I don’t see why the one result should affect the other. If either Alibaba or SoftBank acquired Yahoo! and agreed to keep Yahoo! core separate -- and they believed in Mayer’s long-term plan -- they could encourage her to stay on as CEO and see that plan through, either as a private or a public entity.
My original point in arguing for a sale to either of these entities is that Yahoo! will be on the hook for at least a $17 or $18 billion tax bill when they sell their stakes in Yahoo! Japan and Alibaba. Why not save a substantial amount of those taxes and share them with their shareholders as well as Alibaba and SoftBank? It’s picking up a dollar on the street. It has nothing to do with Mayer’s strategy -- unless her only reason not to sell is because she likes to be the CEO of a $37 billion company vs. a $5 billion company. But that is not her decision; it is the decision of Yahoo!’s shareholders.
Minich believes Mayer made a conscious decision to turn her back on Yahoo!’s legacy display business in favor of building up native ads. Why would any CEO turn her back on a profitable business just to let it go into free fall while building up some new type of business? If Minich is correct, Mayer was incredibly reckless and naive in doing so. If he’s wrong, and the business just died out of bumbling the sales leadership and general neglect, it doesn’t reflect well on Mayer either. There’s no reason she couldn’t have sustained the existing business as much as possible while working at getting native ads going. This brings me to the next point.
Minich believes I’m giving up on Mayer “a quarter too soon” – “a classic example of Wall Street short-term thinking.” His optimism is that, in the Yahoo! second-quarter report, the number of ads sold increased 24% year over year and now native ads are 40% of impressions sold. He believes that Yahoo!’s sales organization is better today because (A) Yahoo! isn’t dependent on “the whims of a few agencies and large advertisers” and (B) they now have a more “diversified customer base” of “many thousands of large and small advertisers.”
He’s dead wrong and here’s why: The agencies and large advertisers aren’t the enemy. Quite the contrary, they are responsible for making it as profitable as it has been for 20 years.
Again, you can walk and chew gum at the same time. Who said you have to neglect the big customers in favor of building out a programmatic offering (which Yahoo! still really hasn’t and doesn’t extend to Tumblr to this day)? This is a total false choice.
The number of ads sold has been going up like crazy for years at Google (GOOGL) because when you’re serving up more ads on mobile pages in addition to desktop pages, the number goes up. This metric in and of itself is no great feat for Yahoo!, especially when it appears on many pages that Yahoo! has stopped selling a highly profitable banner ad and replaced it with two dirt-cheap “native” ads.
Price and revenue are what matter here. So, if I hire Henrique de Castro, ignore Interpublic Group (IPG) and Nissan (NSANY), take down a bunch of banner ads because I have no inventory, insert a bunch of low-paying native ads, see my display business collapse, all I have to do is say that this was my plan all along to focus on native and any critics are short-termists who should just sell out of the stock if they don’t like it?
Let’s talk about “native” ads, too. Native ads are a fancy new term for something old called “sponsored links.” Yahoo! has failed at selling sponsored links for more than a decade. But 10 years is too short term? Should we give Yahoo! another decade to sell sponsored links?
The old chairman of Yahoo!, Roy Bostock, loved talking down to shareholders as being too short-termist. He was there for Semel, Yang, Bartz, Morse and Thompson before Dan Loeb mercifully pushed him out the door. It was always the same with Bostock: Anytime a shareholder complained, they weren’t giving the current management and board enough time to deliver on their long-term vision.
Minich thinks Mayer should keep its headcount at 13,000 full time and 4,000 on contract. I side with Marc Andreessen that at least 10,000 could be cut and productivity would actually improve. He says that I shouldn’t compare Yahoo!’s headcount to IAC’s because it’s a different type of business. What about comparing it to Facebook (FB), which has half the number of employees as Yahoo! but more than double the revenue ($10 billion vs. $4.62 billion)?
Minich thinks the $2 billion Mayer has spent on Tumblr and acqui-hires has been great because it retrofitted a 12,000 person company with new layers of talent. My question is, if the point of spending this $2 billion was to get talent, how do you explain articles like this one talking about the Yahoo! acqui-hires now leaving to start new independent companies?
What are all these talented people doing at Yahoo!? I know the venture capitalists backing them were happy to get the cash from Yahoo! shareholders, but -- two years later -- what have Yahoo! shareholders received back in exchange for their $2 billion, besides a core business currently valued at negative $400 million?
In closing, I don’t believe there’s a strategy Mayer and her management team are following. If there is, I haven’t heard it articulated other than “daily habits.” If I am wrong, let’s hear the strategy. Let’s hear that it was the plan all along to ignore the large ad agencies, auto makers and consumer products companies and why that has made Yahoo! a more “robust” business today.
The best thing for all -- including Mayer, I believe -- would be to sell the company now to either Alibaba or SoftBank and take Yahoo!'s core private. Yahoo!’s core business should do all the messy, behind-the-scenes turnaround stuff as a private company and not one that has to report quarterly.
At the time of publication, the author was long YHOO, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, solid stock price performance, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although YHOO's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 2.99, which clearly demonstrates the ability to cover short-term cash needs.
- Net operating cash flow has slightly increased to $357.41 million or 8.03% when compared to the same quarter last year. Despite an increase in cash flow, YAHOO INC's average is still marginally south of the industry average growth rate of 17.69%.
- Compared to its closing price of one year ago, YHOO's share price has jumped by 30.19%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- The gross profit margin for YAHOO INC is currently very high, coming in at 83.10%. Regardless of YHOO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, YHOO's net profit margin of 24.87% compares favorably to the industry average.
- You can view the full analysis from the report here: YHOO Ratings Report