Whither Yahoo?

Ever since Yahoo chairman of the board Roy Bostock fired Yahoo CEO Carol Bartz (by phone, no less), everyone in the industry seems to be wondering what the venerable search engine will do next. Here’s a run-down of possibilities.

If you’re looking for a starting point, we covered Bartz’s dismissal and even discussed possible Yahoo buyers () last month. A few new pieces of information have come to light since then, including one or two interesting rumors that should give all interested parties some food for thought.

First, I’ll share some disappointing, albeit not surprising, news for Yahoo fans. Internet ranking company comScore just released its September 2011 search engine rankings for the US. They paint an ugly picture for Yahoo. The venerable search engine lost nearly an entire percent point when compared to its standing in August 2011, while Google gained half a percentage point and Microsoft remained even.

These numbers look really sad when you compare them to last year’s figures from comScore. In September 2011, Yahoo held 15.5 percent of the US search market, but in September 2010, it held 16.7 percent. The year-over-year percentages for August were 17.4 in 2010 and 16.3 in 2011. You probably can’t tell from the way I presented the figures, but Yahoo’s decline may be beginning to accelerate: between August and September 2010, Yahoo lost seven-tenths of a percent, but in the same period for 2011, it lost eight-tenths of a percent. That probably doesn’t sound like a lot, but when you’re talking about billions of searches every month, and advertising money based on eyeballs, it makes a difference.

In the face of shrinking market share, Yahoo co-founders Jerry Yang and David Filo, along with chairman Roy Bostock, told the company’s employees that they’re focused on growing and improving Yahoo’s core business. “What Yahoo Needs to do better – and we’ve talked about this – is accelerate innovation, reignite inspiration, and give our users what they want now – great content that is engaging and easy-to-use on any device and provides an experience in which they can participate and contribute. Perhaps most importantly, we need to anticipate what they will want next. That is the path to enhancing the value of Yahoo for all of its stakeholders,” the three said in a letter to Yahoo employees.

Many analysts wonder whether trying to grow the company really makes sense at this point. As The Street pointed out, Yahoo’s share of Yahoo Japan could be worth more than $2.3 billion. Its 40 percent stake in Alibaba, The Street notes, “could fetch a value of roughly $12 billion.” Yahoo’s own search and display ad business is valued at anywhere between $5 billion and $8 billion, depending on which analysts you ask; that includes about $2.6 billion in cash and short-term investments. A buyer, or Yahoo’s stockholders, might get more money out of splitting the company up and selling it off piecemeal.

But who would buy Yahoo? Speculation ranges from AOL, Alibaba’s Jack Ma (who has made no secret of wanting to buy Yahoo’s stake in his company back), Microsoft, DST Global, Silver Lake Partners, and several others. Who should be interested in buying Yahoo? According to Herman Leung, an analyst at Susquehanna Investment Group, a traditional media company like Disney or News Corp. might be attracted enough by Yahoo’s digital presence to pay a premium for the company.

A purchase of Yahoo by Microsoft might still offer the best deal for shareholders. Several observers called the search engine’s refusal of a $31 a share offer from Microsoft for the company a “fiasco” and a “mistake.” According to Clayton Moran, an analyst with The Benchmark Company, “The best thing for Yahoo would be a sale of the company…A full takeover by a strategic buyer like Microsoft would likely bring the highest premium. It would certainly be the cleanest exit. Selling the Asian assets has proven a difficult and complicated process.” Microsoft would gain assets it could integrate into its own business, and even after Yahoo spurned its offer for an outright purchase in 2008, might be willing to lay down the most money for the troubled company.

The person most widely accused of queering that deal was Jerry Yang. His personal antagonism toward Microsoft is well known; he refuses to use Microsoft products in both his professional and personal life. And there are now rumors circulating that Jerry Yang himself is considering a purchase of Yahoo. He is reportedly in talks with private equity firms, trying to work a deal that would take the search engine off the public markets. But what would be the point? According to Reuters, taking Yahoo private would shield the search engine from the ruthless beating Wall Street dishes out to non-growth companies. A buyer such as Yang could sell off Yahoo’s international assets, then use the money gained from that transaction to pay off debt. It would leave Yahoo with only its US operations – and achieve the focus on the core business that Yang seems to want.

Whether that’s the best move from the point of view of Yahoo’s various stakeholders (employees, stockholders, management, the board of directors, even the users) is another question. And there’s no telling whether Yang will be allowed, or be able, to pull off this deal. Perhaps he’s hoping, as Reuters seemed to suggest, that a private equity firm will be willing to keep him on board after taking the company private, in the hope of benefiting from his deep knowledge of Yahoo. If given the chance, though, could he actually “restore the company to its former glory, away from the harsh eyes of Wall Street,” as Reuters suggests Yang hopes to do? There’s no telling. 

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