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Yahoo! has been the subject of many rumors since the firing of CEO Carol Bartz. It has been a possible acquisition candidate for Microsoft, Google and various Private Equity firms. Alibaba.com, who Yahoo owns approximately 42% of, was also mentioned.
The latest rumors involve Yahoo selling a minority stake, 20-30%, to a third party PE firm or maybe even Microsoft. Through out all of this Yahoo has yet to find a new CEO.
None of the discussed solutions would return Yahoo to its former glory as an Internet growth stock. Growth at Yahoo has been flat for a number of years and all attempts to reinvigorate the business have failed. Yahoo needs to take the money it has made on its Yahoo Japan and Alibaba.com investments and implement a three pronged attack to re-invent the firm and find the next big thing AGAIN. My suggestions are:
The ability to grow revenue is necessary for all firms looking to generate above average returns for their investors. Yahoo has had revenue growth issues, as everyone knows, for many quarters. My analysis, along with conversations with people I know in the valley, has convinced me the current Yahoo business portfolio will not and cannot provide suitable revenue growth. Changing the CEO will not fix this nor will updating the platform. Yahoo needs a change in strategy, it has a great brand name and is still profitable, but it needs make one or more acquisitions to restore the growth investors are demanding.
Yahoo should be commended for its astute investments in Yahoo Japan and Alibaba Group, now is the time to use those investment as the foundation of their next wave of growth. The Yahoo Japan stake would generate approximately $6 billion in cash. The Alibaba Group stake might take longer to unwind. Once the stake is monetized, Yahoo should have another $5-$6 billion, depending on taxes, plus of cash, as the stake in alibaba.com alone is worth approximately $12 billion. The total cash influx of $12-$18 billion, depending on taxes, should be used to;
- Make a suitable acquisition(s), Hulu came to mind, before it was pulled, to grow revenue in the short term
- Create a $500-750 million internal VC fund to incubate the next big business for the longer term
- Buy back stock or Dividend
The plan I have outlined would generate short term revenue growth via acquisition to restore investor confidence while the longer term incubation fund will growth the next big thing for Yahoo. The share buyback will help EPS and stock price in the shorter term while the plan is being implemented.
Yahoo is a firm that had the vision to make investments for the future and now is the time to use those investments to move Yahoo into its second wave of growth.
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