Author: Barry Randall, Crabtree Asset Management
Covestor model: Crabtree Technology
If newly appointed Yahoo (YHOO) CEO Marissa Mayer has any sense of occasion, she should name her new baby boy (due this October), "Wayne." That's as in Wayne Gretzky, the professional hockey great who had an uncanny sense of where the puck would be. Mayer and her husband should do this because success at Yahoo isn't going to be about fighting today's fights—but rather thinking ahead to where the next fight will be.
Social networking? Sorry, Facebook (FB) is already there. Search? Google's (GOOG) got that wrapped up. (Yahoo should know: its search alliance with Microsoft (MSFT) has gone nowhere in its two-year life span). Digital content? Apple (AAPL) is king of the download.
Microsoft is the object lesson here: they've spent hundreds of billions of dollars going toe-to-toe with existing, dominant players like Apple (Zune), SAP (SAP) (Dynamics), Sony (JP:6758) (xBox) and Google (Bing, MSN) and have virtually nothing to show for it.
Microsoft's Consumer Devices segment has had some success (e.g. xBox), but the division overall, which includes Windows Phone, sits on cumulative losses of over $4 billion. If Microsoft, with their unlimited access to cubic dollars, can't profitably unseat an incumbent, then Yahoo's chances of doing so are nil.
So what realm is large; addressable by Yahoo; and has no clear front-runner? That's for Ms. Mayer to decide. But at least one decision has already been made for her. There can be little doubt that Ms. Mayer's selection was made with the explicit blessing of activist Yahoo shareholder Dan Loeb of Third Point LLC.
Mayer's product-oriented experience at Google, contrasts sharply with interim CEO Ross Levinsohn's content-focused CV. This strongly suggests that Mr. Loeb, owner of 6% of Yahoo's common, and the newly constituted board of directors sees Yahoo's focus to be on engaging and enlarging its substantial user base. This will probably mean a steady stream of new and innovative products and services, rather than more media or content deals.
It's worth mentioning here that thanks to being Google employee #20, Marissa Mayer has amassed a net worth of $300 million. (Her new $100 million, five-year pay package at Yahoo isn't too shabby, either.) Anyone with $300 million in the bank who still feels compelled to take on a challenge as daunting as leading Yahoo rather than retiring to a life of pampered leisure is clearly driven by larger forces. And this is why Mayer should buy $100 million of Yahoo stock in the open market.
If Mayer is going to acquire hot start-ups and recruit superstars to join her in this battle, she has to be "all in" or nearly so. One of the common themes surrounding her hiring is that she can't lose. If she wins, she's achieved what her high-profile predecessors couldn't; if she loses – well, it's Yahoo. But putting $100 million down in the middle of the table is saying she can lose. A lot. And that attitude and commitment will attract the right kind of talent.
Because real, substantive change is going to be measured in quarters and years, Mayer should telegraph to her board and to the world at large that early milestones (i.e., those in the next six months) won't be major product releases or financial goals.
Rather, they'll be signifiers: the purchase of a white-hot private company or the hiring of a no-questions-asked operational superstar. And speaking of recruiting, isn't it nice that the liability of Yahoo's low stock price becomes a virtue, because it can be offered to new hires as part of a compelling compensation package. Hey! Just like a start-up.
Yes, a lot of people are probably going to get fired (middle managers, hopefully). Yes, Mayer is certain to catch flak for taking some time off this fall to tend to her newborn. Yes, Ms. Mayer may make a mistake or two (Google Buzz, anyone?).
But with $2 billion in cash right now, and $4 billion more on the way after it sells half its stake in Alibaba, Yahoo and Mayer are loaded for bear. With an essentially zero return on cash, Mayer has nothing to hold her back from deploying that cash quickly. So what should she do specifically?
My suggestion is that she waits until the FTC disallows Facebook's obviously anti-competitive offer to buy Instagram and then offer to buy the latter for $500 million.
With this move, Yahoo will instantly have a credible and explosively growing platform in image-based social networking, and the acknowledged best mobile photo sharing service. This is the future, because mobile sharing is what teenagers are doing, and doing differently than adults.
And voila: Mayer and Yahoo won't be on the defensive but will be where the growth and action are. The remaining troops will be energized. The smart kids will change Yahoo's status from "Not Cool" to "Looking." And Dan Loeb will probably smile.
She shoots. She scores.
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