NEW YORK (TheStreet) -- Chegg (CHGG) CEO Dan Rosensweig was asked about Yahoo! (YHOO) while on CNBC Wednesday -- and he's a good guy to ask. Rosensweig was the successful COO there for many years under Terry Semel.
When asked about what CEO Marissa Mayer would buy with her cash pile, Rosensweig said, "The problem is: what can she bid on that would be great? Facebook (FB) , Google (GOOG) , and Apple (AAPL) can all outbid her."
Dan Primack from Fortune wrote a post Wednesday explaining why Rosensweig was wrong.
His argument is that Mayer could outbid these giants if only her board would unshackle her.
Instead of doing deals as she has done to date, involving many of her advisers and underlings, Primack argues that she should be more like Mark Zuckerberg. In other words, she should be given a blank check from the board and negotiate the deal one-on-one. This way, there would be no leaks to the press and one of the big guys couldn't swoop in and outbid her.
"To be sure, Mayer does not have the same structural clout at Yahoo! that Zuckerberg has at Facebook. She is not the company's founder, nor does she control anywhere near a majority of voting stock. But if the board really still believes in her vision for the company, then it should give her a defined checkbook and the flexibility to negotiate without interference....
"Yahoo! can still compete for big deals. But only if it gets out of its own way."
I think Primack is wrong that governance and procedure have held Mayer back from doing "transformational" deals.
Here's the problem.
1. Basic economics still apply.
Rosensweig is right that Yahoo! is still a minnow against any of those other companies he mentioned. The press keeps referring to the cash Yahoo! now has thanks to the Alibaba (BABA) IPO as if it could buy the world. It can't.
Yahoo! has about $9 billion in cash after it pays taxes on the Alibaba IPO sale. By contrast, Facebook has $14 billion in cash, Google has $65 billion and Apple has $155 billion. But all those companies also have enormous stock valuations. In fact, all the big Facebook deals lately have included a huge component of stock.
All the $2 billion which Mayer has spent on deals in the last two years for Tumblr, Flurry and the acqui-hires has been with Yahoo!'s cash.
If Yahoo! goes after any big, interesting company -- let's say Pinterest for $10 billion -- it will be outbid in a flash. Even if Yahoo!'s board empowers Mayer to have coffee with Ben Silbermann -- Pinterest co-founder -- 20 times, he's not going to sell his company for $10 billion to Yahoo! without beating the bushes at the other tech giants too. His board would never let him do that. They'd say "going once" to Facebook, and Zuckerberg wouldn't let them say "going twice."
2. Mayer has spent $2 billion in acquisitions so far.
Those acquisitions have contributed no revenue and no profits to the company to date. Mayer hasn't demonstrated enough credibility with negotiating multibillion deals on her own. Tumblr may work out, but it's still very much a work in progress.
By contrast, Zuckerberg's first big M&A deal was Instagram for $1 billion. That property is now worth probably $25 billion or more and it effectively removed a huge competitive threat to Facebook. He earned the right to spend a lot in stock on WhatsApp and Oculus Rift even if they never works out -- because he got the first one right.
3. Yahoo! hasn't even proven that it can compete for smart small deals yet.
It seems pretty obvious that Yahoo! is going to be acquiring some companies in the ad tech space if you listened to the last Yahoo! earnings call. There was a rumor a couple of weeks ago that they'd be buying BrightRoll for $750 million. The deal hasn't been confirmed yet and a number of people, including me, were surprised by the target and the amount of money Yahoo! was willing to pay.
The prize in ad tech on the supply side in the last year has been the San Francisco-based LiveRail, which was acquired by Facebook in July for $400 million (reportedly). Yahoo! should have gone after it and bought it first. Why didn't it? Why wasn't it paying attention and going after something that not everyone was talking about before the fact?
It wasn't because Marissa hadn't been given leeway by her board. She and her team just missed it. Then, when they realized they needed some ad tech assets too, they seemed willing to run in and pay double what Facebook did for a vastly inferior property.
To compete against the big guys, Mayer needs a clear and well-defined strategy for Yahoo!'s -- and for how it's unique. She then needs to acquire smaller pieces that smartly fit into the strategy.
A dollar spent on an acquisition should return multiple dollars of value (whether in cash, profits or stock price) within a couple of years for Yahoo! shareholders.
At the time of publication, the author was long YHOO and BABA.
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 A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: YHOO Ratings Report