So Verizon is buying the heart of old Yahoo! I include the exclamation point because it was always there in the Yahoo! we knew back when the Internet was young. $4.83 billion in cash is a lot of cash, but for Verizon it’s a way of buying into the future while buying what to many of us seems to be the past.
So let’s get the business part out of the way: Verizon can see Yahoo! as a bargain because Yahoo! has nearly always been more profitable on a gross margin basis than Verizon, a phone company. Even Yahoo! in decline will pull Verizon up. But that’s not why I’m writing about Yahoo! I’m writing because a reader yesterday more or less suggested I do so. At the risk of my sounding like Donald Trump, the reader suggested I had been right all along about Yahoo!
“Did Yahoo just implement your recommendations?” he asked. “That would make a good article”.
I don’t know if Yahoo! listens to me or not, but for those who remember it the column the reader had in mind was published here on September 30, 2014, nearly two years ago. Titled One way (maybe the only way) Yahoo can succeed, it recommended selling the Yahoo! core business and managing Yahoo!’s Alibaba and Yahoo Japan investments as a giant venture fund roughly equivalent in size to all of Sand Hill Road, where the VCs park their Teslas.
Nothing much has changed in the intervening two years except for a whole lot of monkey motion. Sometimes I wish people would actually read this stuff I write. So here it is again because the advice is still good:
One way (maybe the only way) Yahoo can succeed
Alibaba’s IPO has come and gone and with it Yahoo has lost the role of Alibaba proxy and its shares have begun to slide. Yahoo’s Wall Street honeymoon, if there ever was one, is over, leaving the company trying almost anything it can to avoid sliding into oblivion. Having covered Yahoo continuously since its founding 20 years ago it is clear Y! has little chance of managing its way out of this latest of many crises despite all the associated cash. But — if it will — Yahoo could invest its way to even greater success.
Yahoo CEO Marissa Mayer, thinking like Type A CEOs nearly always seem to think, wants to take some of the billions reaped from the Alibaba IPO and dramatically remake her company to compete again with Google , Microsoft , Facebook, and even Apple.
It won’t work.
Those ships have, for the most part, already sailed and can never be caught. Yahoo would have to do what it has been trying to do ever since Tim Koogle left as CEO in 2003 and regain its mojo. There is no reason to believe that more money is the answer.
It’s not that Mayer isn’t super-smart, it’s that the job she is attempting to do may be impossible. She has the temperament for it but the rest of Yahoo does not. Even if she fires everyone, Yahoo still has a funny smell.
In practical terms there are only two logical courses of action for Mayer and Yahoo. One is to wind things down and return Yahoo’s value to shareholders in the most efficient fashion, selling divisions, buying back shares, and issuing dividends until finally turning out the lights and going home. That’s an end-game. The only other possible course for Yahoo, in my view, is to turn the company into a Silicon Valley version of Berkshire Hathaway. That’s what I strongly propose.
Mayer seems to be trying to buy her way ahead of the next technology wave, but having been at this game for a couple of years so far, it isn’t going well. Lots of acqui-hires (buying tech companies for their people) and big acquisitions like Tumblr have not significantly changed the company’s downward trajectory. That’s because that trajectory is determined more by Google and Facebook and by changes in the ad market than by anything Yahoo can do. It’s simply beyond Mayer’s power because no matter how much money she has, Google and Facebook will always have more.
It’s time to try something new.
While Berkshire Hathaway owns some companies outright like Burlington Northern-Santa Fe railroad and GEICO, even those are for the most part left in the hands of managers who came with the businesses. At Coke and IBM, too, Berkshire tends to trust current management while keeping a close eye on the numbers. Yahoo should do the same but limit itself to the tech market or maybe just to Silicon Valley, keeping all investments within 50 miles of Yahoo Intergalactic HQ in Sunnyvale.
Yahoo’s current stakes in Alibaba and Yahoo Japan are worth $36 billion and $8 billion respectively and Alibaba at least appears to be on an upward trajectory. With $9 billion in cash from the Alibaba IPO Yahoo has at least $50 billion to put to work without borrowing anything. $50 billion is bigger than the biggest venture, private equity or hedge fund.
Mayer is smart, but maybe not smart enough to realize the companies in which she is interested could do better under their own names with a substantial Yahoo minority investment. That would leverage Yahoo’s money and allow a broader array of bets as a hedge, too. Mayer can pick the companies herself or — even better — just participate in every Silicon Valley B Round from now on, doing a form of dollar cost averaging that puts $15 billion to work every year. With future exits coming from acquisitions and IPOs (and possibly winding-down its own tech activities) Yahoo ought to be able to fund this level of investment indefinitely. Yahoo would literally own the future of tech.
Silicon Valley companies that make it to a B Round (the third round of funding after seed and A) have dramatically better chances of making successful exits. Yahoo wouldn’t have to pick the companies, Hell they wouldn’t even have to know the names of those companies, just their industry sectors and locations. Forty years of VC history show that with such a strategy investment success would be practically guaranteed.
As opposed to the company’s current course, which is anything but.