Yahoo destined for tech graveyard due to poor choice in chief executives
Investors are trading Yahoo’s shares below the value of its holdings in Yahoo Japan and Alibaba
Yahoo’s tragedy will soon come to its closing act because there will be nothing left to turn around after the current struggle. It is consigned to the same path to the tech graveyard taken by Digital, Blackberry, Palm and others who failed to choose the right chief executive to lead the hazardous journey to migrate their technological platforms.
If Yahoo’s activist investor, Starboard Value, successfully persuades Yahoo’s board for the third time over corporate strategy, Yahoo will probably sell its operating business, and Yahoo will be a shell company consisting of shares of Alibaba, Yahoo Japan, and US$5 billion in cash. It represents a last-ditch effort to save whatever value remains and would likely end the tenure of chief executive Marissa Mayer.
For the past decade, Yahoo has gone through five chief executives. Each new turnaround or reinvention campaign has met with doubt and failure. The ultimate condemnation is that investors are trading Yahoo’s shares below the value of its holdings in Yahoo Japan and Alibaba, therefore assigning no value to Yahoo’s operating business. Starboard has calculated that the market is only valuing Yahoo’s core business at about US$2 billion.
Yahoo’s US$4.6 billion in revenue makes it the fifth-largest website in the world. But at that price the market is implying that it has surrendered any hope of Yahoo ever growing or creating value in the future. Thus, a buyer could strip out its saleable parts, lay off staff, and still make money on the purchase. That Yahoo started with such hope and promise and ended up as a carcass to be picked apart by private equity vultures is an ignominious fate.
But Yahoo’s real problem stretches back to its early days when Jerry Yang and David Filo were allowed to run the company. Founders, especially young ones with little corporate and real world experience, may be great inventors, but establishing and articulating a large business vision, running a sprawling management team and constituency that sustains shareholder support requires long experience.
Jerry Yang wasn’t qualified to be chief executive – he had little corporate governance experience and his organisational skills were limited to project management. While he led Yahoo’s investment in Alibaba, he failed his shareholders by not accepting the Microsoft offer. The result was that during his tenure, valuable time was lost to find the next strategy and direction while others like Google surged ahead. But founders can’t help but to feel entitled to take up a leadership mantle that is beyond their skill set.
Google was fortunately led in its early days when Eric Schmidt, a former chief executive of Novell, joined in 2001. Larry Page and Sergey Brin acquiesced to his leadership. As a result they matured as managers under Schmidt’s guidance. Today’s Google eventually usurped Yahoo in search, vaulted into numerous areas and has transformed into Alphabet, a diversified innovation company. It’s almost unbelievable to recall that in 1997, Larry Page pitched Google to Excite, who could have bought it for US$750,000.
Determining the right kind of chief executive for a tech company at a particular stage of development represents the most frustrating and critical issue. The weakness of chief executives with a tech start-up or product background like Mayer is that they try to invent and innovate a large corporation out of a problem and into a breakthrough strategy.
Manoeuvring a large organisation of inventive people is like trying to steer an oil tanker populated with cats. A leader needs to recognise the need to massively restructure, tear down entire divisions and defy institutional momentum. That demands different skills than a tech founder who is only used to growth and lavishing benefits on staff during good times.
While a dual-class share structure would have protected Yahoo from the withering fire of hedge funds masquerading activist shareholders, it wouldn’t have shielded it from its fundamental management and strategy problems.
The entire premise of Silicon Valley is the vision of a few founders changing the world, or at least an industry, from their garage in Palo Alto. That nature of innovation is impossible for a large organisation to defend against.
The defensive economic moat in tech is a volatile and treacherous pool that requires constant tending and filling. It’s so different from traditional industries, where a strong product can buy management critical time for a turnaround. In tech, one missed opportunity could quickly spell the end. Just ask RIM about how they missed smartphones. Those who live by high growth will die by the lack of it.
Peter Guy is a financial writer and former international banker