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Yahoo! Inc. (NasdaqGS: YHOO): Can Scott Thompson Steady the Ship?

By Chad Fraser on January 5, 2012

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Yahoo! Inc. (NasdaqGS: YHOO) topped yesterday’s business headlines with a move few investors saw coming. The Internet company managed to lure Scott Thompson away from eBay Inc. (NasdaqGS: EBAY), where he was president of the fast-growing PayPal division.

The Yahoo! Inc. Soap Opera Has Gotten Ugly

As Investing Daily editor Jim Fink wrote in September 2011, these are interesting times for Yahoo! Inc. The company’s brand continues to be one of the strongest on the Internet, and its various services have roughly 700 million users. However, Yahoo! Inc. has struggled to grow its business, mainly because of stiff competition from Internet search market leader Google Inc. (NasdaqGS: GOOG) and social-networking services like Facebook and LinkedIn (NYSE: LNKD).

In addition, its agreement to co-operate with Microsoft Corp. (NYSE: MSFT) on the Bing search engine has been disappointing. The two companies had hoped that Bing would help them chip away at Google’s huge lead in paid search advertising.

In July, Yahoo! Inc. reported sharply lower second-quarter sales. An ugly breakup with former CEO Carol Bartz followed in September. As Fink pointed out: “Ms. Bartz didn’t take the news well, telling Fortune Magazine soon afterwards that the Yahoo! board ‘f—ed me over.’”

Snapping Yahoo! Inc. out of its doldrums will obviously be job number one for Thompson. In the press release announcing the hiring, Yahoo! Inc. chairman Roy Bostock said: “Scott brings to Yahoo! a proven record of building on a solid foundation of existing assets and resources to reignite innovation and drive growth, precisely the formula we need at Yahoo!”

Thompson’s Appointment as CEO of Yahoo! Inc. Drew Mixed Reviews

Thompson’s hiring provoked a range of responses from pundits and analysts. Comparisons with Bartz abounded. In an article on TheStreet.com entitled “Why Scott Thompson Makes Sense for Yahoo!,” writer James Rogers struck a positive note: “The relatively low profile that Thompson has kept will work in his favor, particularly when compared to his flamboyant yet often polarizing predecessor, Carol Bartz.”

Rogers also pointed to Thompson’s past successes: “Thompson has an impressive track record at PayPal, which now accounts for around 50% of eBay’s overall revenue. PayPal, which posted its first billion-dollar quarter last year, is expected to contribute $7 billion to eBay’s revenue by 2013.”

Others had reservations about the move. Quoted in an article on wsj.com, Citi analyst Mark Mahaney noted that Thompson “has strong technical and organizational skills (like Carol Bartz) and should bring that rigor to Yahoo! … However, we are somewhat concerned that he does not have strong media/advertising experience, which we believe Yahoo! needs, given the structural issues surrounding the company’s Search and Display initiatives.”

Forbes.com writer Eric Johnson echoed that sentiment: “Thompson’s big weakness is his lack of advertising experience. He was asked about how he was going to improve the display business and he couldn’t respond at all (‘give me some time’).”

Thompson Hiring Seems to Put the Brakes on a Takeover of Yahoo! Inc.

Also lurking in the background is the possibility that Yahoo! could be sold, either whole or in parts. The company turned down a $31-a-share takeover offer from Microsoft in 2008, and Jack Ma, chairman of Chinese e-commerce company Alibaba Group—in which Yahoo! holds a 40% stake—has also expressed interest. Yahoo! is now said to be considering selling two valuable assets: Yahoo! Japan and all or part of its Alibaba stake.

Most analysts thought Thompson’s hiring made a sale of the entire company less likely. Bostock himself seemed to put the brakes on the idea, saying yesterday that he has no plans to take Yahoo! private.

However, Larry Haverty, portfolio manager at Gamco Investors Inc., held the opposite opinion. In a video posted on washingtonpost.com, Haverty said that he thought the addition of Thompson would make Yahoo! Inc. more appealing to a buyer: “I don’t think you can rule out … the likelihood that Jack Ma and/or Microsoft are finished. They may decide, no, I need this business now. I’ve got a guy who can run the part that I don’t want. Maybe I can bring him in, and let’s get the whole thing under one umbrella.”

Either way, investors were less than impressed, sending Yahoo! shares down 3.1% on the day, to $15.78.

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