October 22, 2008
Yahoo Q3 Report, 10% Reduction in Headcount
Yahoo! saw another extremely poor quarter over the past three months and will be reducing its headcount by approximately 10%. I spent yesterday afternoon listening to the investors' conference call hosted by beleaguered Yahoo! CEO Jerry Yang, President Susan Decker and CFO Blake Jorgensen. Their voices sounded as bleak as the information they were expressing. It hadn’t been a good day. It hasn't been a good year. Yahoo! is hurting and there appears to be a lot more tunnel than there is light in their long-term outlook. The purple party's over and no one appears to know exactly when or even if it might start up again. Let's step back to the beginning of 2008 for a moment. We need to go back to understand how Yahoo! got so badly damaged as it moves forward. After Yahoo! delivered a disastrous Q4-07 report, Microsoft made an offer to purchase the company for approximately $31/share in a cash and stock deal. Yahoo! declined the initial offer and two subsequent offers in a protracted process that stretched out over seven months. According to CEO Jerry Yang, Yahoo! wanted between $35 and $37 per share before considering a sale. During this time, Carl Ichan, an investor with a history of corporate raiding got involved and purchased about 5% of the company in the belief Microsoft would increase its bid per share. A few other investor groups including one led by Texas energy giant T. Boone Pickens also acquired a bulk of Yahoo! share, buying into the company when the company's stock traded between $27/share and $21/share. The involvement of stock speculators such as Ichan added an interesting twist to the story. Intense pressure was brought to bear on Yahoo!'s board of directors and on Microsoft CEO Steve Ballmer to make a deal happen. Both sides dug their heels in and the chances of a merger between the two sank as weeks dragged into months. Many in the search marketing community supported a merger between Microsoft and Yahoo! from the day Ballmer posed the question. Google has way too much control of the online advertising market and search marketers are desperate for a competitive ad-network to emerge. Though most of us believed it would be a train wreck of a deal, we tended to agree that combining Yahoo! with Microsoft presented the best opportunity to see competition arise in the online ad market. Yahoo! started looking for life-rafts. An "Anything but Microsoft" movement began placing Yahoo! in talks with AOL, NBC, Digg and eventually, Google. Towards the middle of June and early July, a proposed plan to allow Google to place AdWords on Yahoo! properties began to emerge. Through the ad-distribution plan, Yahoo! would insert Google ads into searches where it lacked sufficient inventory. Yahoo! believes it could add about $800million to its bottom line under such an arrangement. Microsoft and most of the search marketing community tend to disagree, so much in fact that a congressional panel is now investigating the deal to see if it violates federal anti-trust regulations. Similar inquiries are being made in other jurisdictions like the EU and Canada. Recently, Google and Yahoo! announced they were delaying implementation of the ad-distribution agreement because of ongoing congressional hearings. In early August, Yahoo! elected a modified board of directors which included Ichan and two other activist investors. That board was expected to rubber-stamp the Google ad-distribution deal and provide a public face of stability for Yahoo!’s investors. In early August, nobody could have predicted the destabilizing effects of the credit crisis and subsequent financial meltdown. As of this morning, YHOO shares are trading at $12.67 (10:45am PST). Even without the extraordinary drop shown on the stock market, Yahoo! was going to report poor quarterly results. Aside from the Google ad-distribution deal, Yahoo!’s other bright light is found in the display market. Display is down and is thought to be one of the online advertising sectors that will be badly affected by the downturn. Yahoo! is in trouble. A time machine set to 20/20 hindsight might help but unfortunately, Yahoo! doesn’t have one. At this point, I am not sure what will help. It’s too bad because Yahoo! is not only a great group of extremely talented people, it represented the best opportunity to see competition in the PPC space. It appears Jerry Yang will remain as CEO and the board will continue to try to find a set of solutions that work. The only certain thing is that something will certainly happen at in the coming months.