EC Yahoo Is Screwing Its Shareholders

There are a variety of relatively easy fixes that could unlock tremendous value for Yahoo (YHOO) shareholders (e.g. cost cutting, focus, patience, and realigning the workforce), but the leadership team is so prideful and dysfunctional that they’re going to let “anyone-other-than-shareholders” (e.g. private equity, Verizon, or other) recognize these huge profit opportunities.

Background:
Many articles have been written about the perceived “negative value” of Yahoo’s core business (for example, here and here). If you’re not aware, Yahoo owns large stakes (16.3% and 35%, respectively) in publicly traded companies Alibaba (BABA) and Yahoo Japan with market values of approximately $32.6B and $9.1B, respectfully. And since Yahoo’s current market cap is only $36.4B billion (less than $32.6B + $9.1B) many observers use algebra to conclude Yahoo’s core business is worth less than $0. It’s more complicated when you factor in the potential large tax liabilities related to selling Alibaba (Yahoo’s most recent 10Q records a $12.3B deferred tax liability related to Alibaba, more on this later), but regardless, the market is giving Yahoo very little credit for its core business. For reference, Yahoo’s core business includes things like Yahoo Finance, Yahoo Sports, Internet search, communication and digital content.

Yahoo has made a lot of mistakes in recent years. For example, the following graphic provides a high level breakdown of roughly $10 billion in “misallocated capital” (destroyed value) since Marissa Mayer took over as CEO in July of 2012. 

(source: SpringOwl Investor Presentation, p.36)

(source: SpringOwl Investor Presentation, p.36)

Specifically, Yahoo has tried to invent or acquire new opportunities (unsuccessfully) instead of focusing on the aspects of its core business that already work (more on this later). For example, Yahoo paid over $1 billion for tumblr in 2013 and its value today is arguably closer to zero. And more recently, Yahoo worked hard (and spent heavily) to launch Livetext in 2015 (which was supposed to be a Snapchat and Instagram killer) but it has not lived up to expectations and it’s an example of a failed product development cost (i.e. “misallocated capital”). Additionally, Yahoo has failed to transition to mobile from desktop as shown in the following graphics.

Overall, Yahoo has been swinging for the fences and spending heavily in search of the next big thing instead of working to unlock and maximize the tremendous value opportunities they already have.

Relatively Easy Fixes:
There are a variety of relatively easy fixes that Yahoo can make to dramatically increase value for its shareholders. For example, Yahoo needs to increase its focus. As described previously, Yahoo has wasted billions of dollars in the last several years on “Hail Mary” product development and expensive acquisitions instead of focusing on the aspects of its core business that already can be profitable (i.e. Yahoo needs to milk its core businesses for as long as it can). Had Yahoo simply focused on what already works over the last several years then shareholders would have an extra $10 billion in their pockets (and potentially more because the share repurchases would have been accretive). 

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