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Activist Hedge Fund Has a Plan to Revamp Yahoo!

SpringOwl Asset Management LLC sent a 99-page slide presentation to Yahoo! ( YHOO ) for a plan to add $24 billion in value to the company's core businesses. Core businesses exclude the Alibaba ( BABA ) stake, Yahoo! Japan and real estate. The presentation does a good job at reviewing how Yahoo! arrived at its present circumstances. We're reminded of how Yahoo! IPO'd in 1996 and was the dominant portal for users to find information in the early Internet days. The table below shows how people spent their time on Yahoo! in 2006. Users spent their time largely on email, IM, news, media and search.


The company's fortunes changed as users gravitated towards Google ( GOOG ) and mobile devices. From 2007 to 2013, the company bounced between turnaround strategies as the company had five CEOs: Terry Semel, Jerry Yang, Carol Bartz, Scott Thompson and current CEO Marissa Mayer. Stock price appreciation over the last couple of years has been the result of its Alibaba investment while no value has been added to the core businesses.


I was reminded of a Warren Buffett ( Trades , Portfolio ) quote, "The root of my success is acting rationally about capital allocation," when reviewing the slide deck. SpringOwl believes the current CEO has done the opposite and has misallocated $2.5 billion for stock repurchases, $3 billion for M&A activity, and $4 billion in ineffective R&D for a total of $10 billion in capital.

The table below shows how Yahoo! overpaid for stock repurchases.


Yahoo! spent $3 billion for the companies below.


For R&D, Yahoo! spent 18% of its 2014 revenue. On the other hand, competitors like Google and Apple ( AAPL ) spent 15% and 3% on R&D respectively. An example of a product development flop was Livetext, an app where users could text and see their friends in real time but could not hear them.


SpringOwl has a nine-step approach to turn Yahoo! around:

  1. Bring in an operations-focused CEO who changes the culture of excessive spending.
  2. Bring in new directors to the board. SpringOwl is concerned that the current board has been too accommodating to the current CEO.
  3. Yahoo! recently stopped its plans to spin off Alibaba and is now considering a spinoff of the core business. There is tax uncertainty in both plans. Instead, SpringOwl wants to bring in an advisor to determine the best way to unlock value from Alibaba and Yahoo! Japan.
  4. Cut headcount to 3,000 employees. The company currently has 12,000 employees. When comparing revenue to head count ratio with a company like Facebook ( FB ), Yahoo! appears to have too many people.
  5. Focus on their finance and sports properties. Finance and sports are two areas where Yahoo! has a loyal customer base.
  6. Stop investing in search efforts. Many people are skeptical about Yahoo!'s attempts to reinvent the mobile search business.
  7. Stock buybacks when share prices are depressed.
  8. Sell unused office space.
  9. Look for other value creation opportunities.

The proposals are summed up in the slide below. It doesn't look like SpringOwl's suggestions are offering anything beyond what we've heard before. However, their slide deck is a good overview of Yahoo!'s business and its many challenges. I also found one of the traits needed for the next CEO to be especially interesting, "[Next CEO has] No snobbery when understanding and embracing Yahoo!'s core audience who lives in 'fly over' country and not in the bubbles of high society San Francisco and New York." I take the quote to mean that there's a disconnect between Yahoo consumers who still use legacy properties (i.e., finance, sports, email, etc.) and current management who is trying to force new products upon those users. You can see the full slide deck here .


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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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