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Confusion Reigns at Yahoo! Inc.–Again

By Chad Fraser on May 15, 2012

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When Scott Thompson arrived at Yahoo! Inc. (NasdaqGS: YHOO) after a successful term as head of eBay’s (NasdaqGS: EBAY) PayPal unit in January, there was a sense that the company might finally be finding its footing.

It had been a long time coming, too: Yahoo Inc. had endured a long period of turmoil that started in 2008 when the company turned down a $31-a-share takeover offer from Microsoft Corp. (NasdaqGS: MSFT).

In May 2010, Chinese e-commerce company Alibaba, in which Yahoo owns a 40% stake, transferred its Alipay subsidiary to another Chinese company 100% owned by Alibaba chairman Jack Ma. Alipay represented $1.7 billion of Yahoo’s valuation at the time, but the company was never informed of the transfer. Yahoo and Alibaba later negotiated a settlement in which Alibaba would retain a 37.5% stake in Alipay’s equity value, but it was still a major loss for Yahoo.

How Things Went From Bad to Worse at Yahoo! Inc.

All this led up to the firing of former CEO Carol Bartz in September 2011. And if that wasn’t enough, the company seemed to be hurtling toward a messy and expensive proxy fight with hedge fund Third Point, run by activist investor Daniel Loeb, which owns 5.8% of Yahoo Inc.

That dispute centered around the company’s rejection of Third Point’s nominees to the Yahoo board (one of which was Loeb himself) in March 2012 in favor of its own nominees. At the time, Yahoo! Inc. backed up its decision by saying that “other candidates were more qualified for the position,” and “that appointing Mr. Loeb to the Board is not in the best interest of the Company and its shareholders.”

The conflict got even uglier two weeks ago, when Loeb accused Thompson of padding his resume by claiming to have a computer science degree that he didn’t, in fact, have. Thompson later admitted to the inaccuracy.

Desperate to get a handle on the situation, Yahoo struck an independent committee to look into Thompson’s credentials. That provoked a harsh response from Loeb: “It seems farcical to us,” he wrote in a May 9 letter to the board, “that the board will most likely spend more time deliberating over whether Mr. Thompson should be fired than it did properly vetting whether he should have been hired.”

Thompson Exits Yahoo! Inc.; Loeb Wins Big

What, then, to make of the events of this past weekend? In a Mother’s day press release, Yahoo! Inc. announced that Thompson had left the company, and that Ross Levinsohn, former head of Yahoo’s Americas division, would take over as interim CEO. And in a major win for Loeb, the company relented and allowed three of Third Point’s nominees, including Loeb himself, to join the board.

The exact circumstances of Thompson’s departure weren’t immediately clear, and were further clouded by reports on Monday that the former CEO had told his colleagues at Yahoo that he was suffering from thyroid cancer.

Analysts See the Clock Ticking on a Yahoo! Inc. Turnaround

Still unclear is where the company goes from here. Thompson had begun a restructuring, including laying off 2,000 workers and focusing on media and advertising, but the company didn’t say whether it planned to continue down that path.

At TheStreet.com, Charles Ciaccia thought new CEO Levinsohn should look to none other than legendary investor Warren Buffett for ideas on how to turn Yahoo around. Ciaccia wrote:

“When Buffett took over Berkshire Hathaway in 1962, it was a struggling New England textile firm, but thanks to purchasing businesses outside of textiles (namely insurance and savvy investing from Buffett), Berkshire transformed itself. Yahoo could do something similar, albeit focused on the technology space.”

According to Ciaccia, step one would be a renewed push to unlock some of the company’s value, which mainly consists of its stakes in Alibaba and Yahoo! Japan, and slowing share buybacks to conserve cash. It would then use these funds to buy high-growth businesses, utilizing Loeb’s skill at investing in undervalued companies.

What Yahoo Really Needs? “Another Steve Jobs”

Taking the less optimistic view was Forbes.com contributor Erika Morphy, who thought that after all these years of turmoil, Yahoo is simply too far gone for a turnaround.

But if the company is to rise again, she thinks it needs someone in the mold of another business titan, Steve Jobs, someone who “can turn Yahoo around through sheer force of intellect, will, personality and imagination.”

But who would be willing to take on such a task? In Morphy’s view, “no one in his or her right mind, that’s who.”

Valuable Asian Assets Aren’t Enough to Drive Yahoo’s Renaissance

In the end, though Yahoo’s Asian assets are valuable, it’s hard to see how a company with so many internal struggles will be able to compete in the cutthroat Internet business in the long term, especially when it’s up against dominant companies like Google (NasdaqGS: GOOG). and social networks like Facebook.

The stock has more or less been moving sideways at around $15 since late 2008. That reflects the ongoing internal instability at the company. And given the events of the past few weeks, it’s hard to see how it’s going to break out of that range anytime soon. 

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