So Why Was Yahoo Worth $4.8 billion?

AUGUST 2ND, 2016
Back in 2008, Microsoft CEO, Steve Ballmer, decided to make a run to acquire Yahoo. Negotiations began in a friendly manner with both companies interested in seeing how their combined assets could be used to build something that was lacking at both companies at the time: excitement. Google's search business was the Goliath of the industry with no sign of David on the horizon. Apple had recently released the iPhone which caught Microsoft (and everyone else) off-guard. Facebook was also gaining ground quickly. I worked at Microsoft during this time as a vendor, and the chatter around the water-cooler could be summed up as: "Ballmer is going to pay how much for Yahoo!?" Microsoft offered $44.6 billion for the company in 2008. A staggering amount, given that Microsoft's largest acquisition at the time was $6.3 billion for aQuantive. Yahoo leadership resisted the offer by demanding they were worth more and began flirting with other potential buyers. After a couple of months, Microsoft withdrew its offer, and Yahoo failed to convince another suitor to make a counter offer.  At the time, Yahoo claimed victory. But in hindsight, Microsoft dodged a bitter financial bullet.

The Alibaba Conundrum

Fast forward eight years. Microsoft is still around selling its cash cows in Windows and Office, but has a new CEO whose focus is clearly on the cloud. Yahoo hired Google executive, Marissa Mayer, as CEO with the hope of building out a media giant instead of going head-to-head with Google in search. Mayer tried to remake the company in a mobile-first world by releasing apps (Sports, Weather, Finance) on Android and iOS. She made search deals Microsoft and later Google. But none of these moves could revive the company in the minds of employees and shareholders. The internet giant had two aces up its sleeve: It owned 15% of Alibaba, the Chinese online retail company and 36.4% of Yahoo Japan.  Think of Alibaba as the Chinese version of supersized version of Amazon for the Chinese market that captures 80% of all online purchases in China. It's massive, and it's growing like mad. They were sitting on this massive gold mine, because the only way to invest in Alibaba was to invest in Yahoo. Most of the $36 billion value was derived from the stake in Alibaba. This fact helped them maintain the stock price, but everyone knew that eventually they would have to sell its stake in the online business. A number of prominent investors demanded that happen sooner than later. It became a game of differing priorities for the shareholders and Yahoo brass. Mayer understood that holding onto Alibaba gave her more time to grow the company's other assets, even if that meant angering some shareholders. Mayer tried her best to gather a young pool of tech talent and rework the company strategy. However the efforts meant spending big, while the revenue was on a declining trend. Yahoo went on an aquisition binge, by purchasing over 50 companies, mostly tech startups, for some $2.5 billion. Among these aquisitions were some high-profile (read expensive!) companies such as Tumblr and Polyvore.

Verizon Steps Up

Yahoo was facing pressure to make drastic changes to its business model. Activist shareholder, Jeffrey Smith, CEO of Starboard, who was recently added to the board of directors, the future of the company looked uncertain at best. Smith immediately began pushing Mayer to drastically reduce expenses and find a way for shareholders to benefit from the company's holdings in Alibaba and Yahoo Japan. The stake in Alibaba alone is worth $30 billion while the stake in Yahoo Japan worth about $9 billion today. Mayer tried to shake things up by replacing a number of high-ranking leaders up and down company. She garnered praise by improving employee benefits but was the source of much scorn when telecommuting was scaled back. Quarterly earnings calls became a stage for investors to prod Yahoo leadership to sell its stake in Alibaba and Yahoo Japan instead of focusing on Yahoo's core products. With not many options left, Yahoo decided to auction off its core businesses that include search, email and advertising tools to the highest bidder. That turned out to be Verizon as we found out this past week which offered $4.83 billion for Yahoo's assets*, but do not include the stake in Alibaba or Yahoo Japan. You might remember that Verizon also purchased one-time internet titan, AOL, last year for $4.4 billion. Back in 1999, AOL had a market cap of $222 billion. Yahoo peaked at $140 billion just a year later, and yet Verizon purchased both companies for about the same price Microsoft purchased Skype for in 2011.

Why Would Verizon Want Yahoo?

For the same reason it wanted AOL: advertising. Verizon is primarily after the ad and content business, the same reason it purchased AOL. Combining the assets from both AOL and Yahoo would allow Verizon to build the kind of scale that's required to make a profit from digital advertising on mobile devices. The telecom giant doesn't need to read the tea leaves to understand its traditional telecom business is slowing, and purchasing the two ad giants allows them to skate to where the puck is going.“Verizon is trying to pivot its business from analog to digital. Verizon believes that a combined AOL/Yahoo would provide the digital advertising platform they need to execute their video reinvention strategy.”  --Analyst Craig Moffett of MoffettNathansonIn spite of all its issues, AOL was able to put together a combination of ad-buying and targeting tools that were optimized for video. Those compliment the editorial and advertising business Yahoo adds to Verizon's toolbox, not to mention the massive audience from portals like sports, finance, email and photo sharing. According to Mayer, these websites regularly get over 1 billion users. Verizon must look at that and recognize a huge audience for all those mobile ads. Yahoo is an odd mix of products today. In many ways, they are a remnant of what the internet looked like over 20 years ago. When I fired up my first version of Netscape Navigator I immediately went to Yahoo to begin my journey. When I worked at an internet service provider, we set the homepage for all users coming from AOL or Prodigy to Yahoo. This was to give them a familiar, directory-type, entry point. While I haven't visited the portal in a desktop browser in years, I find a number of their iOS apps quite compelling, specifically their weather and sports apps. Monetizing apps is a brutal business though. Yahoo could never quite figure out how to get enough users to pay for Tumblr and Flickr, which it still owns.

The Future is Uncertain

Some see the purchase of Yahoo as the end of an internet giant. For those of us who have been around since the early days of the internet there will always be nostalgia around it. It was the first search engine many of us used. At the time, it was magic; type in a few words and it would provide a listing of possible destinations. Yahoo existed to send you elsewhere, knowing you'd return to begin another journey. If it wasn't your homepage, it was certainly in your bookmarks. A number of competitors arose to take its place such as Alta Vista, Excite, and HotBot. It wasn't until Google arrived on the scene that users realized there was a better mousetrap. I don't believe Google killed Yahoo. I think Yahoo believed their technology was superior to that of their competitors. They overvalued that technology to the point they failed to recognize Microsoft was their best option back in 2008. It would have required leadership to swallow their pride. Microsoft, combined with Bing, would certainly be stronger and more valuable than Yahoo's core assets are today. Yahoo also failed to migrate its business from the desktop to mobile. Facebook made the transition and last week reported a $2 billion profit on just over $6 billion in sales. The number that blew me away is that 84% of that is from mobile users. Now that's how you transition your user base. On person who can't help but win no matter the outcome is Mayer. She had tough-nosed negotiations with the Yahoo board years ago. The contract could net her $55 million if Verizon decides to let her go. In a note to employees announcing the Verizon deal she said, "Yahoo is a company that changed the world." That's one thing we can all agree on.*Edit: At the time of writing this article, Verizon and Yahoo were in talks for a $4.8 billion transaction. After the disclosure of two massive security breaches at Yahoo that happened in 2013 and 2014, the price of aquisition went down approximately 350 million dollars, and the company agreed to be sold for $4.4 billion dollars.