The bids to buy Yahoo’s operating business, rumored to be between $4 billion and $8 billion, are in—and my guess is that they are all high. Think back to 2008, when Yahoo turned down a $44.6 billion hostile bid by Microsoft, which wanted control of a very robust online business combining search, finance and sports.
Boy, did those Microsoft guys dodge a bullet. Eight years later, Yahoo is for sale, with Verizon and a few private-equity companies picking at the carcass. The company’s current $35 billion value is all about its holdings in Alibaba and Yahoo Japan. And Yahoo’s core Web business, the part that’s for sale? In my opinion, it’s worth virtually nothing.
How can that be? Last year the company did about $1 billion a quarter in net revenue, and more or less broke even. But revenue for the first quarter of 2016, reported last week, is down 11%. About $240 million of Yahoo’s annual revenue, according to Re/Code, comes from licenses and fees paid by Yahoo Japan, which may dwindle in 2017. In the tech world, if you’re not growing, you’re dying.
Under CEO Marissa Mayer, Yahoo has tried everything to jump-start growth. She bought the blogging site Tumblr in 2013 for $1.1 billion in cash. At the time, Tumblr had a meager $13 million annual revenue. Early this year, Yahoo wrote down $230 million of Tumblr’s value. There’s probably more to come. Suffice to say, the deal has been a huge flop.
The company has also thrown money into media—Yahoo Global News Anchor Katie Couric in your browser! She reportedly generated 150 million streams last year. Not bad. Yet the “Today” show gets about 25 million viewers a week. Google does 3.5 billion searches a day.
The rest of Yahoo? Its legacy business of search and display ads is dragging the company down. By now, it ought to have a robust mobile business. But can you think of any must-have app from Yahoo? Of the top 100 free apps in Apple’s store when I checked this week, it had just one: Yahoo Mail. It was No. 96.
Yahoo has close to 10,000 employees and expects to lay off 10% or more this year. That means, for the winning bidder, an almost never-ending stream of cash expenses and asset write-downs.
The big chunks of Alibaba and Yahoo Japan that the company owns are an albatross. Why? Because buying shares inside a corporate structure is always dumb. The tax bill is murderous and there’s no long-term capital-gain benefit.
Maybe Verizon, which bought AOL last year, wants to add Yahoo to build out an ad-serving power house. Good luck with that. It might not like that a lot of Tumblr is filled with, uh, nasty bits.
Is there a way out for Yahoo? Sure but it’s ugly. Downsize fast to 5,000 employees or fewer. Shut down everything except mobile. Sell enough Alibaba and Yahoo Japan shares to cover two to three years of negative cash flow. The stock may crater, but so what?
Attract coders with cheap stock options. Start doing hackathons and greenfield projects—mobile apps, cloud services, chat bots, artificial intelligence, all focused on consumers. License hot new technology to the Ubers and Airbnbs and DoorDashes and Pinterests. Become the “go to” partner, the anti-Google.
But it’s easier to sell and let a giant phone company figure things out. Sad? Not in the least. Silicon Valley is a dog-eat-dog world, and to quote Norm from “Cheers,” Yahoo is wearing Milkbone underwear.