Is it time for Yahoo to say goodbye to the public stock market?
Yahoo was among the first Internet companies in history to go public, and now has a 20-year run living in the public markets.
But the company has been in a constant state of crisis and turmoil for at least half of that time. The long-awaited turnaround in Yahoo’s business has frustrated a string of CEOs and investors, with CEO Marissa Mayer the latest to try her hand and come up short.
One intriguing idea now making the rounds is whether Yahoo might finally be able to save itself by going private.
The idea was most famously modelled by another tech pioneer that fell on tough times. Michael Dell, the founder of the eponymous PC company, did just that in 2013. After getting battered on Wall Street for years, Dell hooked up with Silver Lake Partners, ponied up some of his personal fortune, and orchestrated a $25 billion deal that turned the PC maker back into a privately held firm (though the results are still up in the air).
For Yahoo, the thinking goes, a similar move might be just the ticket to salvation. And a slew of private equity firms are sniffing around Yahoo, eager to help Yahoo go private.
But while it’s entirely possible that Yahoo could be taken private, retiring the YHOO ticker is unlikely to provide a magic formula that will bring the company back to growth.
Going private means getting out of the harsh glare of the public eye. “You can make changes and not be scrutinised,” says one Wall Street analyst who covers Yahoo. “And you’re not looking at the clock every 90 days to report your earnings, so there could be some benefit strategically,” he explains.
For Yahoo, that kind of flexibility sounds like it could be a big benefit. After all, Yahoo would be able to make some really big bets to develop innovative new products or go after new markets — the kind of stuff that takes money and time, and which doesn’t usually sit well with myopic investors. Given that Yahoo is competing with giants like Google and Facebook, some might argue that those kinds of big bets are indispensable if the company is to have any chance of success.
The problem is that Yahoo has already been making big bets. It spent more than $1 billion to acquire Tumblr, it’s spent hundreds of millions of dollars to swallow up dozens of smaller startups and it’s ramped up its spending and hiring in recent years.
So far the results have been pretty lacklustre. Yahoo’s revenue is basically flat since 2012, the year that Mayer took over and began the turnaround plan. But the company’s annual operating expenses in 2015 were roughly 19 per cent higher than in 2012 (that’s after you deduct a massive $4.46 billion goodwill impairment charge that Yahoo recorded in 2015).
The growth rathole
And while Yahoo’s investments have failed to pay off in the public market, it’s possible that the company could get even less leeway to chase growth as a private company.
The private equity firms that Yahoo needs to partner with to finance a go-private transaction are “not going to throw money down a growth rathole,” says Ryan Jacob, who manages the Jacob Internet fund which owns shares in Yahoo.
“A private equity firm is not necessarily going to embark on a growth strategy. They’re going to embark into a profit realisation strategy,” says Jacob.
That means slashing costs as close to the bone as possible without endangering the cash flow the company still generates.
Rather than turning Yahoo into the next Facebook, going private would more likely mean cleaning up the company up by cutting costs, and then reselling it.
Given all the disparate assets that Yahoo has, including non-core assets that the CFO recently pegged at $1 billion to $3 billion, the company could also be broken up and sold off piecemeal.
“The idea that this is going to be something like a Dell situation, that they’re going to go private, get out of the public glare to invest more for growth…that’s not going to happen,” says Jacob.
So what does this mean for the long-awaited Yahoo turnaround?
A more likely path to redemption for Yahoo may come from another big company, such as Verizon. The giant telecom company, which has expressed an interest in acquiring Yahoo, could pair Yahoo with its recently-acquired AOL business and create a successful advertising technology business.
But that would downgrade Yahoo to a mere cog in a bigger machine. Not exactly a great comeback story.