Last month, embattled Yahoo announced plans to spin off its core Internet holdings into a separate public company while keeping its sizable investment in Chinese e-commerce giant Alibaba. This bit of financial engineering is designed to avoid possible tax consequences and unlock value for shareholders unhappy with Yahoo’s flagging performance.
But the core issue remains: Can Yahoo still reinvent itself? Over its 20-year history, several CEOs have tried to do it. The current chief, Marissa Mayer,has been at the job since 2012 with a vision to make Yahoo a leader in mobile content. But trouble is brewing for the former Google executive.
“Yahoo may be able to turn around its core business, but the divide between possible and probable is wide,” Rick Summer, a Morningstar strategist, said in a December research note. “Marissa Mayer has been at the helm for three years, but declaring a successful turnaround is premature, in our view.”
What’s more is that Yahoo will lose the benefit of selling its valuable Alibaba stake and reinvesting the proceeds from that sale into funding its turnaround effort, saysEmilie Feldman, a professor of management at Wharton.
Yahoo’s revenue has steadily declined under Mayer and is projected to continue on that path through this year, according to filings with the U.S. Securities and Exchange Commission and Goldman Sachs’ 2016 estimates. At the end of 2016, Yahoo’s revenue, excluding traffic acquisition costs, is expected to fall 16% to $3.75 billion from nearly $4.5 billion in 2012.
Yahoo’s traffic remains mired in third place on comScore’s Top 50 U.S. Web Properties list in 2015 — the same spot where it was in 2012 — while Facebook jumped to the No. 2 spot from its No. 4 position during the same period.
“Yahoo’s brand has lost relevance, and it will be hard to rebound.”–George DayMeanwhile, Yahoo has struggled with various challenges, such as deciding to focus on becoming an Internet portal instead of search and dealing with aflurry of executive departures, says Patrick Moorhead, founder and president of Moor Insights & Strategy. “Yahoo missed important cycles in the industry,” he says. “Yahoo moved from a search model to a destination portal model. But as the rest of the industry moved to search to find what they were looking for, Yahoo stuck with its destination model.”
With its missteps over the years and flagging financial performance, investors had been pushing the former Internet darling to spin off its Alibaba investment stake, whose value alone is about equal to Yahoo’s entire market cap — basically pricing its other operations as next to nothing.
Although Yahoo had been planning to move forward with the Alibaba spinoff in January, it changed its mind as concerns lingered over whether the IRS would allow the transaction to go through tax-free, or potentially levy billions of dollars in taxes. Instead, Yahoo decided to engineer a reverse spinoff that will separate its core Internet business and a 35% investment stake in Yahoo Japan, leaving its Alibaba stake within Yahoo.
As such, Yahoo is not enacting a traditional spinoff in which a company separates slower-growing businesses to focus on high-growth areas, or operations that are no longer important to its current strategy, Wharton’s Feldman says. The more traditional type of spinoff tends to lend itself to a potential turnaround or reinvention of the company.
In the past 12 to 18 months, a number of companies have announced traditional spinoffs of their lackluster businesses, Feldman notes. She points to Hewlett-Packard’s recent decision to separate its slower growing PC and printer business from its enterprise business, and ConAgra Foods’announcement to break the company into two: The consumer brands business will be under Conagra Brands and frozen potato business under Lamb Weston.
Old Dog, New Tricks?
Laura Huang, Wharton professor of management, says it’s not too late for a reinvention of Yahoo. “It’s difficult, but it has been done before, so it’s not out of the realm of possibility,” she notes. “It’s hard because as a company grows, it physically must start to divide into silos to maintain operational efficiency. This, in turn, leads to fragmentation in the organizational culture, and people start to work in more isolated ways, rather than collaboratively, which is key for innovation.”
“The trouble is that CEOs are designing turnaround strategies for problems today, but their competitors are doing it too, and faster.”–George Day
George Day, an emeritus professor of marketing at Wharton, says that while companies that have successfully turned their business around share common traits, one thing is crucial. “It boils down to a new management team,” he says. “You need a CEO who can look at the company through the eyes of the customer and competitors.”
It is through this lens that the company needs to view the marketplace. Why did the company’s products or services lose relevance with the customers? “Market studies are not enough,” Day says. “I worked with a company and had every member of the C-suite meet with at least two major customers who had defected in the past year. They got an earful. They had to listen, understand and then take action. It was a fundamental re-thinking of the C-suite, and the CEO was the one to lead it.”
Day, along with Duke University professor Christine Moorman, wrote a research paper about successful turnarounds titled, “Regaining Customer Relevance: The Outside-in Turnaround.” The paper, which explored the strategies of IBM, Charles Schwab, Starbucks and others, said companies need to find out how and why customers are changing, identify their new needs, understand why a company’s value add is less relevant and research what competitors are up to and what it takes to leapfrog ahead of them.
In addition to viewing the company through the eyes of a customer or competitor, it’s imperative to look ahead to what the trends and challenges will be two to three years out, says Day. “The trouble is that CEOs are designing turnaround strategies for problems today, but their competitors are doing it too, and faster,” he says. “They need to be looking at where their customers, competitors and their channel will be in the next two to three years. Yahoo has done too little, too late.”
One method that Day’s corporate clients use when he works with them on turnarounds is to take a military approach called “red teaming.” This calls for the company to also play the role of the enemy or competitor, which allows executives to see what their rivals could be up to. “Red teaming builds into the mindset the way that the competitor thinks,” he says.
“Yahoo may be able to turn around its core business, but the divide between possible and probable is wide.”–Rick Summer
But a turnaround will take time to execute, and the process can vary depending on such factors as the industry served, Day notes. Generally, it is best to secure some early wins within the first six months, he says. In the service industry, where customers can easily switch to a competitor’s offering, a company that comes up with a winning game plan can grab market share quickly and do very well, he adds.
While Yahoo has faced pressure from activist shareholders such as Starboard Value LP to sell its operations, Yahoo chairman Maynard J. Webb, as well as Mayer, had indicated in a conference call to announce the reverse spinoff that the company was not actively searching for a buyer.
Nonetheless, some industry observers have said that by putting Yahoo’s core business assets into a separate public company in a reverse spinoff, it will make it easier for a potential buyer to value the company without being buoyed by the Alibaba investment. Indeed, Yahoo’s reverse spinoff may put the company in a good position to sell itself over time, Wharton’s Huang says.