Mista P B D man... but can a hedgeistentialist transform a slogging YHOO? Or is it that Yahoo! have to want change?
Dan Loeb Vs. Yahoo - Regaining A Foothold In Internet Services
March 21, 2012 by: Insider Monkey | about: YHOO, includes: AOL, GOOG, MSFT
Hedge fund manager Dan Loeb has a lot invested in Yahoo ( YHOO). His fund Third Point had a position in the company that was valued at roughly $903 million at the end of fourth-quarter 2011, representing a roughly 6% stake in the company. Loeb has been a critic of Yahoo's board basically since buying into the company. Historically, he has singled out Board Chairman Roy Bostock and Founder Jerry Yang and ultimately demanded their resignations. Loeb was successful on this front - Yang resigned in January and Bostock will resign after the company's 2012 annual shareholder meeting - but it seems there are more deep-seated issues.
Recently, Dan Loeb nominated four members to Yahoo's board - Maeva Group CEO Harry Wilson, former MTV Networks President Michael Wolf, former NBC Universal CEO Jeff Zucker and himself, but his request was met with a chilly reception. The nominees received nothing more than a single phone call from the Nominating and Corporate Governance Committee.
In a letter addressed to CEO Scott Thompson, Loeb reiterated his intention to help Yahoo become the best it can be - maximizing its resources while meeting its operational issues and the current environment. Loeb continued by saying that in trying to get those board members selected, he was trying to develop a planning committee that could meet those challenges and objections. The hedge fund manager also expressed his intention to file a preliminary proxy statement soon if the situation is not resolved.
Another issue facing Yahoo right now is a lawsuit it filed against Facebook, alleging that the social networking company violated 10 of its patents. Yahoo claims that Facebook uses its technology as it relates to messaging, advertising and privacy. Yahoo's lawsuit is generating a lot of controversy in the industry, and could turn into a loss of goodwill, so much so that some people have started to protest the suit. For instance, David Sacks, CEO of Yammer, recently announced that he would pay any Yahoo employee who leaves the company to join Yammer a $25,000 signing bonus.
And, goodwill is something this company cannot afford to lose.
Once upon a time, Yahoo was one of the major players in Internet services. Even just a couple years ago, the company boasted a subscriber volume that was enough to rival even the largest email provider. Today, Yahoo still maintains a large subscriber volume, as of October 2011 over 310 million users in fact, but that is around 12 percent less than Google ( GOOG) Gmail's 350 million users (as of January 2012) or Microsoft ( MSFT) Hotmail's 350 million users (as of October 2011).
Yahoo CEO Scott Thompson is currently engaged in implementing a restructuring of the company. His plan will cut the number of people employed at Yahoo by thousands. Thompson is also planning to review its marginal business and regional efforts, making cuts where profitability may be lagging. He will take a closer look at Yahoo's public relations and research as well.
We think that this is a good call. The company has a lot to work with - for instance, its Yahoo Finance is definitely a top site for finance research and the company has a variety of agreements in place that allow consumers to use their Yahoo login information to access certain services - but the company has a stigma that is just killing it. According to a 2011 survey, people tend to question Yahoo email addresses because of the high amount of spam that uses that domain. This is one hurdle Yahoo will have to overcome if it is going to regain its footing.
Yahoo will also need to reclaim its role as a marketing outlet. It is already in the process of doing so. The company recently joined into an agreement with Microsoft and AOL that will (hopefully for it) gain enough of a following to rival Google's AdWords and AdSense. The platform will allow its customers to place ads on all three sites through a single buy. It's an attempt at convenience, but we think it could backfire. While the data will be tracked individually as well as collectively, with this one-click feature, companies will no longer be able to exploit the difference between, say, Hotmail users versus Yahoo users.
With all these issues, Yahoo's stock performance has taken a hit. In 2011, the stock fell almost 4%. The company's net income and sales also has not fared well but we think that Loeb's influence could be just what the company needs. As it stands, Yahoo has a high gross profit margin of over 81%, after advancing from the same quarter last year. The company also managed to boost its net operating cash flow roughly 5% compared with last year, which is pretty impressive given that it had less money coming in.
Yahoo is also positioned very well with regards to its liquidity. It has a quick ratio of 2.57, meaning it has plenty of capital on hand for short-term expenses. At roughly $15 a share, the company is priced to buy as well - its forward price-to-earnings ratio is less than 16, compared with an average in its industry of 26.08.
We like Yahoo and think there is great opportunity in store for the company but we caution investors to wait a little while before buying in.
Disclosure: I am long MSFT.
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