Michael Wolff: The end of Yahoo

Michael Wolff | USA TODAY

Oh Yahoo!

It has, for quite some years, been the kind of show that can’t be named in a family newspaper, one that is now, finally, coming to its denouement. All will be resolved, with bodies littering the stage.

On Feb. 26, a 30-day window opens for nominations for company directors to be elected at the annual meeting in May. If management has not capitulated by then and agreed to sell the house and contents to the highest bidders, then the activist investor, Starboard Value, alone or in concert with the other hedge funds that have circled the company, will launch a proxy fight that is expected to erase Yahoo’s present board and senior management. And, in due course, there will be no more Yahoo.

Because, from both an investors point of view — as well as from a cosmic one — why should there be?

As it stands now, the company has negative value. Its stake in Alibaba is worth $33 a share and that’s what the entire company now trades at. That means its three other significant components — its $6 a share worth of cash, its almost $9 a share worth of Yahoo Japan, and its approximately $4 a share for its core business (or what some hedge funds have taken to calling its “so- called core business”) — have, as the company is currently construed, no value at all.

For investors the choice is simple. Sell it now in a way that, according to various estimates from some of the funds now heavily invested in the company, would yield approximately $46 a share. Or, look a year or more into the future, when, after a restructuring, Yahoo managers can try again to make good on a turn around plan that they have for several years gamely tried, and abjectly failed at.

In the eyes of investors, and, likely the cosmos too, it is not just mismanagement, and lack of vision, or lost opportunities — not buying Netflix when it was cheap, for instance. Rather the problem is in the nature of Yahoo, and, arguably, digital media itself.

That is, Yahoo — core Yahoo — is a money machine. Twenty years ago, it established itself at an Internet crossroads and the traffic continues to pass by, with Yahoo selling billboard space. The value of this traffic to advertisers rises and falls (largely falls, as advertising rates decline) with all other digital traffic. You can’t meaningfully affect its value, you can only get more of it. And Yahoo, hitting a glass ceiling under Facebook and Google, is pretty much maxed out. The turnaround assumption — maintained in the past few years by CEO Marissa Mayer, but shared by several CEOs before her — is that you could take the money generated from the Yahoo money machine and use it to create something somehow of greater media or technological value. But what? Certainly, the result of this effort at transformation, after quite some years, has been to have spent a lot and to have gained nothing at all.

Mayer in fact was made CEO in 2012 by another activist investor, Dan Loeb, who used Mayer’s bona fides as a Google executive to help raise hopes for a turnaround, allowing him to sell his stock on a high note. Curiously, Mayer was made CEO over Yahoo’s ranking executive at the time, Ross Levinsohn, who was proposing to recognize the commodity nature of Yahoo’s traffic, and to accept the inevitable digital media conclusion: More profits come only from lower costs.

Last week, an angry investor, Eric Jackson, outlined details of Mayer’s spending spree, which has included $3 billion of acquisitions that have no present stock market value and, as well, $450 million on catering for her staff, and called for radical cost cuts.

Yahoo management, seeking to appease investors, began planning a spin-off of its Alibaba interest almost a year ago. This was recently thwarted by an adverse tax ruling from the IRS. Now, the opposite is planned: a spin-off of the core business together with the interest in Yahoo Japan. But here, too, there is a further money machine aspect: Yahoo Japan pays a royalty of about $250 million a year for the use of the Yahoo name. That’s a free $250 million which, instead of being returned to shareholders, will, it is contemplated, continue down the turnaround black hole.

It is, Yahoo’s investors believe, pride that they are paying for. Marissa Mayer and CFO Kenneth Goldman, having spent billions on acquisitions, are struggling to maintain a certain Silicon Valley status. That’s the elusive grail, to find a meaningful place for Yahoo at the top of the tech chain. In fact, there is probably a much more profitable place much lower down the chain. About.com struggled under the aspirations of its owner the New York Times Co., but after it was bought by Barry Diller’s IAC, About cut costs and more efficiently monetized its commodity traffic, significantly raising the company’s value.

But it’s a harsh fate, a recognition that, after the stock market stops seeing you as the future and giving you fantastic multiples, you are only left with the cost-per-thousand value of your page views and, practically speaking, no brand value at all. On the other hand, that’s not nothing.

Some of Yahoo’s hedge fund investors see Diller as a logical buyer of core Yahoo. Verizon, which acquired AOL earlier this year, is another possible buyer of core Yahoo. John Malone’s Liberty, with its aggressive efforts to grow broad content and distribution media, with its control of the Discovery Network and the merger of cable companies Charter and Time Warner, is another likely buyer, some hedge funds believe. Japan Yahoo is, too, a possible buyer not only of its own shares, but of the core. There is, investors believe, a strong market for core Yahoo — or really core Yahoo’s core asset, traffic.

In other words, instead of letting executives spend the proceeds of the money machine, for no evident, or, to many, even imaginable, return, investors want the value of it. Now.