Can Yahoo Turn Itself Around?
On Wednesday, Yahoo! Inc. (YHOO) named PayPal President Scott Thompson as the successor to Carol Bartz as CEO of this dwindling Internet conglomerate. The result was swift as Yahoo's decision was pummeled by investors, analysts, and even its own management. Yahoo shares promptly fell 3.1% as investors remained wary for two main reasons:
Yahoo isn't looking to be bought out, which has disappointed investors that have bought into Yahoo seeking a potential premium if the company is acquired. Rampant takeover rumors of Yahoo have been circulating around the investment community for months, but the naming of Scott Thompson as CEO shows Yahoo's intentions to stay and buckle in for the long run. In fact, with Scott Thompson on board as CEO, the potential for Yahoo buying out other companies has increased, especially if Yahoo is able to gain significant revenue from a tax efficient asset swap of its Asian assets. As Piper Jaffray analyst Gene Munster notes, Scott Thompson's comments suggest a need for the company to expand its offerings, which could potentially translate into a buyout of companies such as Netflix (NFLX) and Hulu, as video continues to remain one of the weakest links in the company's content offeringsScott Thompson, as Jefferies analyst Youssef Squali and anonymous startup board members have noted
, does not have experience in the necessary fields that will benefit Yahoo. Squali notes that Thompson has little media expertise or experience turning companies around, while the startup board members are puzzled by his "lack of consumer web and monetization experience." Squali subsequently downgraded Yahoo to HOLD after its announcement. Even Yahoo management is skeptical of Thompson's abilities; An anonymous Yahoo exec
interviewed by Business Insider believed the replacement to be inadequate, noting they need an "animal" to turn the company around.
In fact, investors are believed to be so discontent with news of the appointment of Thompson as Yahoo's CEO that The Wall Street Journal anticipates a potential shareholder proxy war. Yet, most of this discontent is unwarranted, and this hubbub over Thompson has completely overshadowed some positive signs of Yahoo's changes in strategy.
Regardless of the op-eds and analyst opinions published concerning Thompson's competence, as of now he is an unknown factor, and he will be until he serves the company for a period long enough to warrant justifiable scrutiny of his administration of Yahoo. It would be completely naive of Yahoo shareholders to engage in a lengthy proxy battle without at least waiting to see what changes or strategies Thompson will implement in order to comprehensively analyze his performance as a Yahoo CEO. Although he was President of Paypal and a VP of Tech Solutions at Visa, Thompson understands that the position of CEO at Yahoo is very different and will require all his resources at his disposal.
With that said, Thompson appears to be receptive to Yahoo's strategy to rebrand itself to emphasize its content and media, which is rolling along quite nicely. Yahoo recently announced a flurry of activities dedicated to promoting its partnership with Sundance Film Festival and its streaming of 12 of its shorts. Yahoo has also streamed movies and recently redesigned its video hub in an effort to revamp its image into a center that offers "premium" entertainment. A potential tax efficient asset swap of Yahoo's Asian assets, such as its valuable holdings in Alibaba (ALBCF.PK) could net $17 billion for Yahoo, which, as noted before, would provide much-needed ammunition for a potential acquisition and a catalyst for Yahoo's stock price. An alternative would be Yahoo requesting a direct acquisition of companies as part of the swap instead of cash; according to Bloomberg, Yahoo is currently looking at WebMD Health Corp (WBMD) and the Weather Channel, which is partially owned by Comcast (CMCSA). It will be interesting to see what assets Thompson selects to be included in the tax efficient asset swap (or whether he includes any at all), as this decision could be a very good indicator of Yahoo's future strategies under Thompson.
It also should be noted that there were some bright spots in Yahoo's F4Q earnings report. 4Q EPS for Yahoo increased 31% compared to the same quarter EPS of last year. The 4Q earnings report also came in 23.5% above analyst estimates and the average EPS growth of the last 3 quarters amounted to a progressive 23%. Overall, Yahoo's 3-Year EPS growth rate is 12%. However, even though earnings looked solid, sales have taken a significant hit. 2011 4Q sales fell 24% year over year while the 3-Year Sales growth rate is -9%. Yahoo aims to change this with its aforementioned strategy, which has already shown some positive signs. However, Yahoo's profitability is small, with a low annual ROE of 8% and an annual Pre-Tax Margin of 13.2%
Yes, there are considerable obstacles for Yahoo and its business strategies, but there's no better time for Yahoo to embark on its road to recovery than now. I would advise, at least for the moment, waiting on the sidelines for developments to come in concerning Thompson's heading of the company and the status of Yahoo's Asian assets before deciding whether or not to invest in Yahoo.