A Struggling Yahoo Changes Course

SMITH BRAIN TRUST -- Responding to pressure from shareholders, Yahoo has dropped a plan to spin off its holdings in Alibaba, a Chinese e-commerce company. Instead, it will create a new company consisting of Yahoo's core businesses, including search, email and news content, plus the company's stake in Yahoo Japan. 

The move could open the door to the eventual sale of the core parts of Yahoo, which continue to struggle. While Yahoo gets an extraordinary amount of Internet traffic — more than 200 million visitors monthly in the U.S. — it has been having a hard time turning those visitors into money. Its revenue is up only 0.4 percent since 2011. President and CEO Marissa Mayer's bold strokes, including producing original entertainment (for instance, a season of "Community"), hiring star reporters and personalities (Katie Couric, recently given a raise to $10 million a year), and acquiring the personal publishing site Tumblr, have failed to make a positive difference in the bottom line.

After it lost decisive ground in its original ventures — Google has trounced it in search, and Facebook, Twitter, and others passed it to become go-to social platforms — Yahoo finds itself without a clear mission, says Rajshree Agarwal, the Rudolph P. Lamone Chair and Professor in Entrepreneurship at the Robert H. Smith School of Business and director of the Ed Snider Center for Enterprise and Markets. "Mayer has asked investors to stay tuned for a new business strategy," Agarwal says. "But we don't know what Yahoo's old strategy was." 

She says a business model needs to be clearly articulate: "'What is the value proposition? What are the core resources and positioning that underlie that value proposition? What is the value network that the company is relying on?' And based on those factors, 'What is the profit formula?'" Agarwal says Yahoo has not articulated its  business model is as it relates to any of those four questions.

In the third-quarter earnings call, Mayer said she was bullish on the core company's prospects. "We have the right talent, the right strategy, and the right assets to drive long-term sustainable growth for our investors," she said. But Agarwal points to a string of departures from the ranks of Yahoo's top management and says Mayer is caught in a catch-22. "Because of a lack of a business model, she is losing her best people. And losing her best people implies that she will be even less able to execute on any of her plans."

Yahoo's stake in Alibaba is worth some $30 billion — the result of a timely $1 billion investment a decade ago. That dwarfs what Yahoo's core businesses are worth. Analysts have valued them at roughly $2 billion to $4 billion (or, depending on how you do the accounting, and subtracting out Alibaba's value, at zero or less than zero). Mayer and her team had proposed spinning off a company that would include the Alibaba holdings, with the deal designed in a way that Yahoo would avoid paying taxes on those shares. Yahoo asked the IRS to state in advance that its reading of tax policy was correct, but the IRS declined to do so, meaning that Yahoo could end up on the hook for billions in taxes.

Activist investors, including Starboard Value, thought that was too big a risk to take, and pushed Yahoo to think instead about selling its core businesses. After meeting last week, the board reversed itself and announced it was doing just that.

The board says that Yahoo is not for sale, and that it still supports Mayer. But a sale of the spun-off company remains a possibility. For while Yahoo's business may look stale in comparison to that of one-time peers like Google and Facebook, it might still be enticing to a media company that wants to increase its reach. News Corp. (owner of The Wall Street Journal), Time Inc., and Barry Diller's IAC/InterActive Corp have all been mentioned as possible suitors. Verizon, which acquired AOL, has said it might consider acquiring Yahoo.

Mayer's legacy might be shaped not by a turnaround, the hope when she was hired, but by whether she can unload the core properties of the fading Silicon Valley giant for a decent price.

SMITH BRAIN TRUST
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