Yahoo: Restructuring, but Still No Reason to Cheer
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The Fiscal Times
March 6, 2012

Scott Thompson, the former PayPal president who took on the top job at Yahoo (YHOO) early this year, seems to be eager to show the company’s competitors and its investors – indeed, the market as a whole – just what he’s going to do. The problem? Those actions may be decisive and sweeping, but so far, it’s not clear that they are going to be enough to revive Yahoo’s fading fortunes.

The blog AllThingsDigital.com reported yesterday morning that big layoffs are in the works – part of a widespread restructuring plan – and could be announced before the end of the month. Parts of the business that don’t contribute directly to its bottom line or aren’t core, ranging from research to public relations, may well bear the brunt of those changes and the associated layoffs. That news came hard on the heels of another scoop by the same blog, that Yahoo! also planned to sell its stake in both Chinese online search engine Alibaba and in Yahoo Japan. Both rumors were followed by slumps in the company’s share price, signaling that investors don’t think that these will be long-term answers to Yahoo’s long-lasting problems. The Asian assets sale may be on hold; the cost-cutting initiatives, combined with a restructuring, sound much more likely.

The question is what kind of restructuring Scott Thompson has in mind for Yahoo, and will those efforts bear fruit? If Thompson is serious about reinvigorating the company’s core operations, he may well be able to do so with fewer people, but he needs to attract the right people – the innovative, driven and creative folks who will bring in fresh advertising revenue. He can cut costs and raise capital by selling off the Asian assets (whose value isn’t fully recognized on the company’s balance sheet and thus is probably tremendously undervalued by its current stock price), and perhaps make some investors happy by passing on part of the proceeds. But that’s not a long-term solution: Sales would strip out some of the company’s most valuable assets.

Think about the bigger picture: Yahoo’s corporate governance and Scott Thompson’s background. At PayPal, Thompson oversaw double-digit growth in the electronics payment business for which he was responsible. In him, Yahoo’s board saw someone in tune with at least some of the major new Internet trends, despite Thompson’s lack of familiarity with the core advertising business. And Yahoo’s board is under pressure, notably from hedge fund manager Daniel Loeb, who has been peppering directors with hostile letters and nominating himself and his peers as candidates to succeed them. Admittedly, the board has been a case study in how not to run a business in the best interests of shareholders, but it is also being overhauled after giving the boot to former CEO Carol Bartz without having a clear successor in mind. How likely is it that that board would hire a new CEO whose strategic vision involved nothing more than cutting the business to its bone?

People are still using Yahoo; the company’s problem is that more of them turn more frequently to its rivals. Its financial picture is mixed, with reasonable profit margins and a rather depressing return on equity, and a share price that seems condemned to linger in the doldrums. Thompson’s goal seems to be getting Yahoo back on track, rather than cutting it to the bone or preparing it for a quick sale to Microsoft (MSFT). Indeed, when the company reported its earnings in January, Thompson told the world that the company needs to “get innovative products that matter into the market.”

It’s hard to be bullish on Yahoo, given the company’s awe-inspiring record of bungling, starting with ceding its search-engine dominance to Google. On the other hand, it may be premature to be overly bearish and assume that the news that is leaking out into the market represents the totality of Yahoo’s strategic plan. Job cuts and even asset sales may be part of that grand design, but this may be one time when the right response is to do nothing on the rumor and wait for the news to decide whether or not to bet on Scott Thompson’s Yahoo or not.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.