by David Shabelman
[Posted on January 30, 2008 - 5:39 PM]
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DiggYahoo! Inc. may be running out of time, and investor patience, to boost the struggling Internet giant, with talk increasing that it is increasingly vulnerable to a takeover.
The company late Tuesday reported fourth-quarter earnings that were in line or even a little better than expectations. But guidance for 2008 was weak, with revenue and operating income projections falling short of Wall Street estimates. As part of the announcement, Sunnyvale, Calif.-based Yahoo! said it would eliminate 1,000 jobs.
Ashkan Karbasfrooshan, a Yahoo! shareholder, said he is losing faith in the company's management. "For people like me who have been supportive and saying the company has a lot of good assets, and it was just the sentiment of the market, after last night I personally said, 'Enough,'" said Karbasfrooshan, who blogs about technology companies at WatchMojo.com.
Rather than acknowledge the company's problems, Yahoo! CEO Jerry Yang and other top executives largely blamed macroeconomic conditions for the company's slowdown, Karbasfrooshan added.
"At some point they have to say there's some execution issues and that they recognize they're not doing a good enough job creating shareholder value," he said. "But you didn't hear any of that. What you did here was, 'It's not us.' These people are out of their element."
Despite such sentiments, Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co., said he does not expect a revolt among Yahoo!'s base of institutional investors. "Certainly the investors we speak with are perfectly aware of the situation--they know exactly what the score is," he said. "But the problem is they're in a dilemma; they have to give time for things to work. But we kind of feel we've seen this movie before and in a time of economic downturn, the likelihood of these growth plans working are diminished."
Lindsay, who has urged Yahoo! to outsource its search business to Google Inc. to boost revenues and to cut costs by making additional layoffs, said Yahoo!'s management has done a poor job articulating their plan for turning the company around. "It sounds great to want to make Yahoo! the 'must-have property' for online advertisers, but they don't give many specifics of how they're going to do it," he said.
In a research note issued after Yahoo!'s earnings, Oppenheimer & Co. analyst Sandeep Aggarwal said Yahoo!'s management "has no credibility with investors," adding that the company "appears irrational with respect to its non-operating assets." Those assets include the company's stake in Chinese Internet firm Alibaba.com and Yahoo! Japan. He also said the only catalysts for significantly boosting the company's stock price are a "management change or chatter of a sale."
Trading at $19 a share as of midday, Yahoo! has a market capitalization of $25.4 billion, a drop of more than 40% since October of last year. Investor sentiment toward the company is so low that Yahoo!'s core operations are being valued at less than $10 a share when factoring in non-operating assets.
Jefferies & Co. analyst Youssef Squali said the Yahoo!'s valuation "increases the chances for activist shareholders and/or unsolicited bidders to want to get involved."
Although companies such as Microsoft Corp. of Redmond, Wash., and eBay Inc. of San Jose, Calif., have long been rumored as potential buyers or merger partners with Yahoo!, reluctance on the part of Yahoo! to merge with a rival and integration risks associated with combining such large companies could make acquisition by a private equity firm a more likely option.
Lindsay, however, said the credit crisis, which has hurt the ability of buyout firms to raise debt to fund big deals, could limit interest from private equity buyers even as Yahoo!'s falling value makes it more attractive to potential acquirers.
"I'm certain it's cropping up on the radar screens of LBO-inclined people, but at the moment we don't see any indication that anyone is actively looking at it, and management would be equally unlikely to seek a private equity deal, primarily because [Yang] already owns it."
Barring a drastic change in philosophy from Yahoo!'s management, investors appear to be stuck with the status quo for now and may have to re-adjust their expectations by conceding that Yahoo!, at least for now, is no longer as attractive an investment as in recent years.
"The reality is I don't think there's a silver bullet they can pull to ignite tremendous growth in the company," said Bill Burnham, managing general partner with Menlo Park, Calif., hedge fund Inductive Capital LP. "In technology, rarely does one company capture multiple waves of innovation so it's not realistic to expect Yahoo! to always be on top of the game."
