The 4 Reasons Verizon Should Buy Yahoo

The 4 Reasons Verizon Should Buy Yahoo

Verizon tipped its hand that it would be interested to buy Yahoo back in December.  In the last few days this possibility drew more attention as Verizon’s CFO confirmed interest on CNBC, and Bloomberg reported that AOL’s CEO Tim Armstrong is investigating a potential acquisition.  There are some very good reasons this deal makes sense:

AOLHooFirst, this acquisition has the opportunity to make Verizon distinctive.  Think about all those ads you see for mobile phone service.  Pretty much alike.  All of them  trying to say that their service is better than competitors, in a world where customers don’t see any real difference.  3G, 4G – pretty soon it feels like they’ll be talking about 10G – but users mostly don’t care.  The service is usually good enough, and all competitors seem the same.

So, that leads to the second element they advertise – price.  How many different price programs can anyone invent?  And how many phone or tablet give-aways.  What is clear is that the competition is about price.  And that means the product has become generic.  And when products are generic, and price is the #1 discussion, it leads to low margins and lousy investor returns.

But a Yahoo acquisition would make Verizon differentiated.  Verizon could offer its own unique programming, at a meaningful level, and make it available only on their network.  And this could offer price advantages.  Like with Go90 streaming, Verizon customers could have free downloads of Verizon content, while having to pay data fees for downloads from other sites like YouTube, Facebook, Vine, Instagram, Amazon Prime, etc.  The Verizon customer could have a unique experience, and this could allow Verizon to move away from generic selling and potentially capture higher margins as a differentiated competitor.

Second, Yahoo will never be a lead competitor and has more value as a supporting player.  Yahoo has lost its lead in every major competitive market, and it will never catch up.  Google is #1 in search, and always will be.  Google is #1 in video, with Facebook #2, and Yahoo will never catch either.  Ad sales are now dominated by adwords and social media ads – and Yahoo is increasingly an afterthought.  Yahoo’s relevance in digital advertising is at risk, and as a weak competitor it could easily disappear.

But, Verizon doesn’t need the #1 player to put together a bundled solution where the #2 is a big improvement from nothing.  By integrating Yahoo services and capabilities into its  unique platform Verizon could take something that will never be #1 and make it important as part of a new bundle to users and advertisers.  As supporting technology and products Yahoo is worth quite a bit more to Verizon than it will ever be as an independent competitor to investors – who likely cannot keep up the investment rates necessary to keep Yahoo alive.

Third, Yahoo is incredibly cheap.  For about a year Yahoo investors have put no value on the independent Yahoo.  The company’s value has been only its stake in Alibaba.  So investors inherently have said they would take nothing for the traditional “core” Yahoo assets.

Additionally, Yahoo investors are stuck trying to capture the Alibaba value currently locked-up in Yahoo.  If they try to spin out or sell the stake then a $10-12Billion tax bill likely kicks in.  By getting rid of Yahoo’s outdated business what’s left is “YaBaba” as a tracking stock on the NASDAQ for the Chinese Alibaba shares.  Or, possibly Alibaba buys the remaining “YaBaba” shares, putting cash into the shareholder pockets — or giving them Alibaba shares which they may  prefer.  Etiher way, the tax bill is avoided and the Alibaba value is unlocked.  And that is worth considerably more than Yahoo’s “core” business.

So it is highly unlikely a deal is made for free.  But lacking another likely buyer Verizon is in a good position to buy these assets for a pretty low value.  And that gives them the opportunity to turn those assets into something worth quite a lot more without the overhang of huge goodwill charges left over from buying an overpriced asset – as usually happens in tech.

Fourth, Yahoo finally gets rid of an ineffectual Board and leadership team.  The company’s Board has been trying to find a successful leader since the day it hired Carol Bartz.  A string of CEOs have been unable to define a competitive positioning that works for Yahoo, leading to the current lack of investor enthusiasm.

The current CEO Mayer and her team, after months of accomplishing nothing to improve Yahoo’s competitiveness and growth prospects, is now out of ideas.  Management consulting firm McKinsey & Company has been brought in to engineer yet another turnaround effort.  Last week we learned there will be more layoffs and business closings as Yahoo again cannot find any growth prospects.  This was the turnaround that didn’t, and now additional value destruction is brought on by weak leadership.

Most of the time when leaders fail the company fails.  Yahoo is interesting because there is a way to capture value from what is currently a failing situation.  Due to dramatic value declines over the last few years, most long-term investors have thrown in the towel.  Now the remaining owners are very short-term, oriented on capturing the most they can from the Alibaba holdings.  They are happy to be rid of what the company once was.  Additionally, there is a possible buyer who is uniquely positioned to actually take those second-tier assets and create value out of them, and has the resources to acquire the assets and make something of them.  A real “win/win” is now possible.

 

Leadership Matters – Ballmer vs. Bezos


Not far from each other, in the area around Seattle, are two striking contrasts in leadership.  They provide significant insight to what creates success today.

Steve Ballmer leads Microsoft, America's largest software company.  Unfortunately, the value of Microsoft has gone nowhere for 10 years.  Steve Ballmer has steadfastly defended the Windows and Office products, telling anyone who will listen that he is confident Windows will be part of computing's future landscape.  Looking backward, he reminds people that Windows has had a 20 year run, and because of that past he is certain it will continue to dominate.

Unfortunately, far too many investors see things differently.  They recognize that nearly all areas of Microsoft are struggling to maintain sales.  It is quite clear that the shift to mobile devices and cloud architectures are reducing the need, and desire, for PCs in homes, offices and data centers.  Microsoft appears years late recognizing the market shift, and too often CEO Ballmer seems in denial it is happening – or at least that it is happening so quickly.  His fixation on past success appears to blind him to how people will use technology in 2014, and investors are seriously concerned that Microsoft could topple as quickly DEC., Sun, Palm and RIM. 

Comparatively, across town, Mr. Bezos leads the largest on-line retailer Amazon.  That company's value has skyrocketed to a near 90 times earnings!  Over the last decade, investors have captured an astounding 10x capital gain!  Contrary to Mr. Ballmer, Mr. Bezos talks rarely about the past, and almost almost exclusively about the future.  He regularly discusses how markets are shifting, and how Amazon is going to change the way people do things. 

Mr. Bezos' fixation on the future has created incredible growth for Amazon.  In its "core" book business, when publishers did not move quickly toward trends for digitization Amazon created and launched Kindle, forever altering publishing.  When large retailers did not address the trend toward on-line shopping Amazon expanded its retail presence far beyond books, including more products  and a small armyt of supplier/partners.  When large PC manufacturers did not capitalize on the trend toward mobility with tablets for daily use Amazon launched Kindle Fire, which is projected to sell as many as 12 million units next year (AllThingsD.com)

Where Mr. Ballmer remains fixated on the past, constantly reinvesting  in defending and extending what worked 20 years ago for Microsoft, Mr. Bezos is investing heavily in the future.  Where Mr. Ballmer increasingly looks like a CEO in denial about market shift, Mr. Bezos has embraced the shifts and is pushing them forward. 

Clearly, the latter is much better at producing revenue growth and higher valuation than the former.

As we look around, a number of companies need to heed the insight of this Seattle comparison:

  • At AOL it is unclear that Mr. Armstrong has a clear view of how AOL will change markets to become a content powerhouse.  AOL's various investments are incoherent, and managers struggle to see a strong future for AOL.  On the other hand, Ms. Huffington does have a clear sense of the future, and the insight for an entirely different business model at AOL.  The Board would be well advised to consider handing the reigns to Ms. Huffington, and pushing AOL much more rapidly toward a different, and more competitive future.
  • Dell's chronic inability to identify new products and markets has left it, at best, uninteresting.  It's supply chain focused strategy has been copied, leaving the company with practically no cost/price advantage.  Mr. Dell remains fixated on what worked for his initial launch 30 years ago, and offers no exciting description of how Dell will remain viable as PC sales diminish.  Unless new leadership takes the helm at Dell, the company's future  5 years hence looks bleak.
  • HP's new CEO Meg Whitman is less than reassuring as she projects a terrible 2012 for HP, and a commitment to remaining in PCs – but with some amorphous pledge toward more internal innovation.  Lacking a clear sense of what Ms. Whitman thinks the world will look like in 2017, and how HP will be impactful, it's hard for investors, managers or customers to become excited about the company.  HP needs rapid acceleration toward shifting customer needs, not a relaxed, lethargic year of internal analysis while competitors continue moving demand further away from HP offerings.
  • Groupon has had an explosive start.  But the company is attacked on all fronts by the media.  There is consistent questioning of how leadership will maintain growth as reports emerge about founders cashing out their shares, highly uneconomic deals offered by customers, lack of operating scale leverage, and increasing competition from more established management teams like Google and Amazon.  After having its IPO challenged by the press, the stock has performed poorly and now sells for less than the offering price.  Groupon desperately needs leadership that can explain what the markets of 2015 will look like, and how Groupon will remain successful.

What investors, customers, suppliers and employees want from leadership is clarity around what leaders see as the future markets and competition.  They want to know how the company is going to be successful in 2 or 5 years.  In today's rapidly shifting, global markets it is not enough to talk about historical results, and to exhibit confidence that what brought the company to this point will propel it forward successfully. And everyone recognizes that managing quarter to quarter will not create long term success.

Leaders must  demonstrate a keen eye for market shifts, and invest in opportunities to participate in game changers.  Leaders must recognize trends, be clear about how those trends are shaping future markets and competitors, and align investments with those trends.  Leadership is not about what the company did before, but is entirely about what their organization is going to do next. 

Update 30 Nov, 2011

In the latest defend & extend action at Microsoft Ballmer has decided to port Office onto the iPad (TheDaily.com).  Short term likely to increase revenue.  But clearly at the expense of long-term competitiveness in tablet platforms.  And, it misses the fact that people are already switching to cloud-based apps which obviate the need for Office.  This will extend the dying period for Office, but does not come close to being an innovative solution which will propel revenues over the next decade.