Yahoo! Needs to Stay Focused on Restructure

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Scott Thompson is the latest Yahoo! (NASDAQ: YHOO) CEO to leave the company abruptly. The reason for his departure is that recently he and his now former company have been the subject of media attention due to overstatements related to Mr. Thompson's bachelor's degree and made in Yahoo!'s SEC filings. When you are the CEO of a company, and in charge of downsizing that company, you are likely to have a lot of enemies and should make sure there are no skeletons in your closet. With that said, I think that Mr. Thompson had enough credibility to continue to serve as a CEO. First, while this event certainly threw Yahoo! off track, I think the new CEO and revamped board of directors should be able to continue the reorganization. Second, Yahoo! offers an attractive valuation compared to its major competitor, Google (NASDAQ: GOOG). Its ranking in search business are improving and I think the company can benefit from its smaller size after the restructuring it announced earlier this year. 

Scott Thompson is a proven business and technology leader in his prior role at PayPal and as a chief information officer at a number of other firms. Scott Thompson made an error on his background in the company's SEC filings. Critics claimed that he should resign and he eventually did. However, I believe this was not in the best interest of Yahoo! and its shareholders. The company should have tried harder to avoid a change in its leadership when going through a reorganization and the economy is still recovering from a recession. The board director mostly responsible for hiring Scott Thompson, Patti Hart, had already agreed to step down once her term expired which I think was the right amount of punishment. Further, the misrepresentation, while slightly embarrassing, did not cause any financial loss to the company or illegal gain to Mr. Thompson.

JP Morgan's recent disclosure that the company suffered over $2 billion of losses due to poor oversight and sloppiness should have had a larger repercussion on JP Morgan Chase's (NYSE: JPM) CEO, Jamie Dimon. I think that this is a better case where the CEO may be lacking the skills to lead a large company. Also, this is having a much more significant impact on the economy than Yahoo!. JPMorgan Chase lost over $10 billion of its market value when the news about the loss was announced and shares of other banks experienced unusual declines. I think it is likely that Harvard Business School will be writing a case study on the recent $2 billion loss at JP Morgan Chase and how its future graduates can avoid the mistakes that led to it.

After years of trying to reach an agreement with Alibaba, Yahoo! recently agreed to sell its 40% stake back to the Chinese web portal. The deal is worth $7.1 billion, but could net a higher valuation and potentially pay Yahoo! shareholders even more. 

Looking forward, the main reason to be optimistic about Yahoo! is not only its valuable assets but its restructuring which I estimate will improve sales and profitability. Yahoo! recently laid-off about 15% of its 14,000 employees in an effort to become a “bold, new Yahoo!.” In other words, Yahoo! will become a leaner organization relying more on freelance content and shutting down 50% of its less important properties.

In addition, Yahoo! is entering into partnerships which I believe is a good strategy as companies can pull together their strengths. One such partnership is the partnership between Yahoo!, Microsoft (NASDAQ: MSFT), and AOL (NYSE: AOL), which was created at the end of 2011 and will allow the companies to share unused advertising space on their properties among their advertising clients. Earlier this year, Microsoft's Bing took Yahoo!'s place as the number two search engine in the U.S. Interestingly, from January 2011 to January 2012, Google grew its search engine ranking to 66.2% (a .3% increase), Bing jumped to 15.2% (a .1% increase), Yahoo! fell to 14.1% (a .4% decrease), and AOL remained at 1.6%. Microsoft recently partnered with Encyclopedia Britannica to add more relevant content to its search results. AOL has also been making moves to stay relevant. Back in April, the company orchestrated a $1.056 billion patent deal with Microsoft which involved selling 800 of its patents to the computer giant. 

It is still too early to estimate the success of Yahoo!'s restructuring and new initiatives. However, there are a lot of promising things happening at Yahoo!. For example, in April of 2012 Yahoo! hired Sam Shrauger who is PayPal's vice president of global product and experience. There are speculations that Yahoo! is working on a payment system and e-commerce rivaling PayPal, Visa (V) and MasterCard (MA).

While the current struggle between Dan Loeb and Yahoo! appears to be over, I think there are many more important things that Yahoo!, its new leadership, and its investors should be focusing on. Battles between investors and the board of directors, while heating up in recent years, are nothing new. A recent article in The Economist mentioned how twenty years ago an investor in Sears, Bob Monks, advertised in the Wall Street Journal that the Sears board of directors, to which the investor hoped to be elected, are “non-performing assets." In Yahoo!'s case it is clearly Dan Loeb's reputation of an activist investor, who is also a newly minted Yahoo! director, and his investment firm that bear the risk of underperforming if Yahoo!'s reorganization is not executed well.

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