Michael Wolff on Yahoo: Only the Media (and Marissa Mayer) Still Believe It Has Value
Admitting failure and offloading the high-traffic, low-growth company as quickly as possible (at whatever price) is the only reasonable outcome for the antiquated web pioneer.
This story also appears in the May 6 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
Yahoo's core business is up for sale — bids were due April 18 — and reports about its financial condition are not good. Re/code, the tech news site run by Kara Swisher, continuing her longtime personal war with Yahoo, got a look at the black book and the bleak picture of its declining traffic and advertising revenue. Other outlets have pounced on the deluded ambitions of Yahoo's widely mocked chief executive, Marissa Mayer.
That media view of Yahoo as a company engaged in an epochal struggle is joined by management, which has, repeatedly, committed vast resources and personal reputations to restore Yahoo's standing as a digital leader. This view is, however, not shared by investors. "They think they're in the business of websites and all that bullshit," says one hedge fund investor who holds a large position and says he would be perfectly happy were the Yahoo "core" to be sold for $1.
That only somewhat exaggerated lack of interest has to do with the disparity in value between Yahoo, the digital media company, and its minority investments in Alibaba and Yahoo Japan. Getting rid of the digital media part of the business clears tax hurdles and unlocks the Gordian knot that keeps shareholders from getting the full value of the vastly larger passive stakes. The low-end value of Yahoo's core probably is a few billion dollars — on about a billion shares outstanding, that's a few dollars a share. But were the Alibaba stake to be sold now, its value to a Yahoo shareholder would be $31.40 a share — but, if you have to pay tax, that'll only be $19.40 a share, according to hedge fund estimates; Yahoo Japan would yield $9.50 a share but, if taxed, only $5.90. In other words, the most profitable business Yahoo can be in is the tax efficiency business.
Mayer and Yahoo management, in an effort to save Yahoo and continue with their turnaround efforts, initially proposed to spin off the investment stakes — but the IRS wouldn't approve this as a tax-free strategy. Then, instead, management proposed to spin off the core — meaning several more years before the passive stakes could be sold in a tax-efficient way (you can't just do something solely to avoid taxes — it has to look legit). But if you just sell the Yahoo core outright, while you'll pay a tax on the relatively small value of the core, you'll be able to do an immediate tax-free transaction with the other assets (i.e., a tax-free stock-for-stock deal with, most likely, Alibaba and Yahoo Japan). Hence, if you really sold Yahoo for only $1, you'd lose a few dollars a share but gain $12 a share on Alibaba alone.
So for shareholders, even discussing the relative potential of Yahoo and its vast web traffic, or placing blame for its long decline, is quite irrelevant. Selling it as quickly as possible, at whatever price, solves the company's problems. In fact, there are no problems — just value ready to be unlocked and money to be made.
Or, rather, the only problem is the continuing — and, to investors, utterly illogical — emotional connection of Yahoo management to Yahoo. It's not just a refusal to acknowledge failure and move on but an inability to understand you achieve success just by acknowledging failure! The entire history of modern Yahoo — after the rise of modern Google relegated Yahoo to second-class standing — is a battle not to acknowledge this failure. From Microsoft's $50 billion offer for the company in 2008 — thwarted because management believed it could create more value on its own — through its five CEOs since, through numerous remakes and activist investor assaults, what appears inevitable has been resisted.
Even now, investors believe managers still balk and might even be subverting the process — even understanding that in all likelihood, the current board soon will be replaced by a slate put up by Starboard Capital, the fund leading the proxy fight, which will surely sell. What is it about Yahoo that remains so tenaciously in the imagination of its managers and, indeed, in the media covering it? Why do they care?
It's the continuing wonder of digital media: How is it not possible to build a successful media business with such a giganto audience? Yahoo remains among the top five traffic destinations. That's seductive math: Say, on average, you get three page views from a visitor, all you have to do is get another view to increase your business by 25 percent. How hard can that be? Just hire Katie Couric, launch new "magazines," fund video initiatives. It's entertainment!
There is, among Yahoo executives, along with willful denial, another sort of stubbornness: Their mission is to prove this can work. They see themselves not as the past but the future. Everybody else catches up with Yahoo. Yahoo is what digital media becomes. After you've exhausted the efficiencies of targeted advertising, and the economies of undergenerated content (hence, everybody's search for "premium" content), and the promise of constant traffic growth (there are just so many people), Google, Facebook, YouTube, Twitter, Snapchat and whoever else are left with having to entertain their audiences. That's the existential place Yahoo got to — and where everybody else will get, too. (See Twitter and its recent deal with the NFL.)
In a way, Yahoo still believes it only has to find the key to its audience's interests and heart to unlock value (it spent $1.2 billion in 2015 on product development). Investors, on the other hand, more and more believe that digital audiences, unlike media audiences, have a finite value. That is, traffic, as opposed to audience, has a limited attention span and fixed behavior. Its value won't be increased by expensively wooing it (that's like trying to woo highway traffic) but only by growing it or spending less money on it.
That might be bad news for the future glory of digital media and for the dreams of managers who seek to lead it, but it's OK news for investors.
Yahoo may seem to be, as Swisher presents the numbers, a melting ice cube. But in the view of its investors, Yahoo, minus its ambitions, still is a good value — Yahoo's traffic, with much lower spending, can offer significant profits. In this view, Yahoo is not a media business, it's a commodity business — traffic has a fixed value. It's simple math: The less you spend on it, the more money you make from it (learning from the Yahoo example that spending more money on this traffic does not make you more money). The strategic buyers — notably AT&T and Verizon, the new traffic factories, but in some reports Time Inc. or the Daily Mail — could eliminate things such as new product development and day-to-day operation expenses ($700 million at Yahoo now), but no longer would be seeking to restore (i.e., buy) Silicon Valley prestige. While investors are happy to unload the core Yahoo at any price and reap the tax savings on Yahoo's investment, in fact they believe a Yahoo sale may command as much as $6 billion. Not because there is anything inherently hopeful about Yahoo but because a new buyer, without ego and just ROI considerations, can accept the dismal value of digital traffic and, while we might never hear much of Yahoo again, get a pretty good return out of it.
Mayer's Legacy: A Speculation-Fueled Stock
By Paul Bond
Circa 2000, Wall Street considered Yahoo more valuable than Disney. What a difference 15 years can make. Yahoo withered under competition, and its stock dropped like a stone. In 2012, it snatched Marissa Mayer from Google to be CEO, yet despite a rising stock price since then — propped up by constant sale rumors — things haven't worked out according to plan, with stagnating revenue, profit and user metrics. Now that Verizon, YP Holdings and Daily Mail & General Trust are among those submitting bids, Wall Street values Yahoo at somewhere near $35 billion (though once its stakes in Alibaba and Yahoo Japan are stripped out, the rest could be worth less than $5 billion). Eric Jackson of SpringOwl Asset Management has been advocating that Yahoo slash annual costs by $2 billion and cut its staff of 11,900 to only 2,900. Says analyst Brett Harriss, "While the core business has suffered from years of mismanagement, Yahoo's built-in traffic could be highly valuable to an acquirer with demonstrated monetization capabilities."