Leave Yahoo To The Yahoos!
Last weekend I went to St. Louis for my cousin’s wedding. I joined hundreds of relatives and friends from all over the world to see the young couple take their vows.
And it was beautiful to say the least.
It really warms the heart to see two bright, young people in love make the ultimate lifetime commitment.
Let’s face it, marriage isn’t easy. Anywhere from 40% to 60% of them end in divorce. In fact, married couples today divorce two-and-a-half times more often than couples did 20 years ago and four times more frequently than couples did 50 years ago.
And divorce isn’t just limited to private individuals.
We also see divorces in the business world.
Take this week’s debacle at Yahoo! (YHOO) for example. The internet giant severed ties with CEO Carol Bartz on Wednesday. And in typical divorce fashion, it wasn’t pretty.
Chairman of the Board, Roy Bostock, bungled the matter from the start. Rather than meet Bartz in person to deliver the bad news, he gave her the heave-ho by telephone. Then to make matters worse, he ended the relationship by reading from a script.
Now there’s nothing illegal about firing an employee by telephone. And lawyers will tell you using a script is the best way to protect the company from liability. But it just seems like a rather disrespectful way to handle a break up.
And as you might expect, Bartz is livid.
She’s been quoted in the media as saying, Yahoo’s board “f-ed me over”. And to Bostock, all the salty CEO had to say was, “Why don’t you have the balls to tell me yourself?”
Forget soap operas, just tune into CNBC for your daytime drama.
Of course, this isn’t the first time Yahoo has had trouble with a relationship. Who can forget the time when Yahoo left Microsoft (MSFT) standing at the altar?
Back in 2008, Microsoft offered to buy the struggling internet pioneer for $44.6 billion. The deal valued Yahoo at $31 per share, a whopping 62% premium over the current share price. But Yahoo’s then CEO Jerry Yang refused to sell for anything less than $37 per share.
In fact, Bostock said at the time, “It is ludicrous to think that our board could accept such a proposal.”
As a result, Microsoft withdrew their offer and the highly anticipated nuptials never happened.
Looking back, it’s clear Yahoo made a horrible decision.
As you can see, the shares have declined steadily throughout 2008 and early 2009, hitting a low of $8.94 at the market bottom. And even though the stock has recovered somewhat, it hasn’t been able to crack the $20 per share level.
Today, Yahoo is trading for just around $14 per share. And the company’s market cap is a paltry $17.9 billion.
What’s more, the drama has taken yet another twist this week.
Activist investor Daniel Loeb said yesterday his hedge fund, Third Point LLC, has purchased a 5.15% stake in Yahoo. And as his first order of business, he’s demanding Yahoo’s entire board of directors resign their positions. In a sharply worded letter to the board, Loeb said:
“From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this Board’s failures have destroyed value for all Yahoo stakeholders.”
Despite the rather public airing of Yahoo’s dirty laundry, investors appear to be taking a second look at the stock. They drove the shares up by more than 6% yesterday on news of Third Point’s activist stake.
So, is Yahoo a good buy at current prices?
The short answer is… no!
The company has been struggling for years. Despite having the most-visited web portal in the US, Yahoo has been losing internet users and advertising revenue to Google (GOOG) and Facebook.
Back in 2009, Yahoo’s share of the US online advertising market stood at 16%. This year the company’s market share is projected to fall to just 9.7%. In contrast, Google’s share is expected to increase to 45% and Facebook’s share is anticipated to more than triple to 7.8%.
What’s even worse, revenues have been declining steadily at Yahoo over the past couple of years. And in the most recent quarter, revenues missed analysts’ estimates.
Yahoo is clearly a company in dire need of a turnaround.
And it’s certainly possible Loeb could be the catalyst to finally right this sinking ship. But it won’t be easy, and it’s no slam dunk. Remember, activist investors Carl Icahn and T. Boone Pickens also tried to turn Yahoo around and failed miserably.
In my opinion, Yahoo’s upside potential is limited.
Even if the company does find a willing suitor, they won’t get anywhere near the premium price Microsoft offered three years ago. And given the intransigent nature of Yahoo’s bungling board, any plan to sell the company or break it up will be met with fierce resistance.
Don’t buy into the Yahoo hype. There are plenty of other opportunities out there with bigger upside and less drama.
Category: Stocks
