Sagging Stock Boosts Yahoo Appeal
For years, a brightly illuminated billboard on Interstate 80 in San Francisco has trumpeted Yahoo Inc. as “a nice place to stay on the Internet.” In a spirit of civic-mindedness during the state’s energy crisis, the company recently let the billboard go dark. Some passersby might wonder whether the move relates to Yahoo’s independence in a dimming dot-com marketplace.
“Yahoo [has] sailed downwind extraordinarily well for five years,” said analyst Henry Blodget of Merrill Lynch. “They are now sailing upwind into a hurricane.”
If Yahoo’s share price drifts much lower, the company will be a prime acquisition target for media giants Viacom Inc. or Walt Disney Co., industry insiders say. Both need a global Internet presence to compete against the newly created behemoth AOL Time Warner, the world’s largest media company.
With a small handful of others, Yahoo has defined the Web experience nearly since the medium’s inception. But that rare symbol of stability in the online world is now fighting for its life amid a downturn in advertising.
Yahoo’s being acquired would put an exclamation point on the dot-com bust of the last year--marking the end of the Web’s infancy and the beginning of an era of ferocious consolidation.
Shares of Santa Clara, Calif.-based Yahoo gained 38 cents to close at $23.81 in Nasdaq trading Wednesday but are off 85% in the last year, giving the company a market value of $13.3 billion. If its shares sink below $20, analysts believe that circling predators will find it an unbeatable bargain.
Little more than a year ago, soaring stock prices pushed Yahoo’s shares to a peak of $216 and its paper value to $130 billion. Instead of using that largess to buy traditional media assets with steady earning power, Yahoo stuck to its original strategy of building an advertising-driven “pure play” Internet network. In a super-heated Internet economy, the company reasoned, why be burdened with slower-growth old media?
That was then. Amid the dot-com implosion and general economic downturn, the ad market has sputtered. And investors have savaged one of the Web’s great success stories.
Yahoo’s stock has been in free fall since last March, and its revenue growth has turned anemic. After soaring 88% last year, the company projects revenue growth of 8% to 17% in 2001. Yahoo is scrambling to reduce its dependence on ads, which accounted for 90% of its $1.1 billion in revenue last year, by developing fee-based services.
Eighteen months ago Yahoo was viewed favorably to its chief rival, America Online, said Michael Parekh, an analyst with Goldman, Sachs & Co. AOL’s dial-up subscription model was threatened by the trend toward high-speed connectivity on the one hand, and by free Internet access on the other.
But AOL turned the tables, using its own inflated stock to acquire Time Warner for about $95 billion. The acquisition not only diversified AOL’s revenue base but it let the company offer new high-speed and interactive television services using Time Warner’s news and entertainment content as well as its speedy cable systems, which pass nearly one-fifth of U.S. homes.
In an interview, Yahoo Chief Executive Tim Koogle defended his decision to pass on such deals.
“We have always been focused on trying to serve our user base with comprehensive, high-value [Internet] services that become increasingly essential to them in their lives,” Koogle said. “Consumers highly value choice made easy”--the secret of Yahoo’s success, he added.
Koogle insisted that continuing this approach will keep Yahoo independent. Analysts say Yahoo founders, management and venture investors, who together control nearly 50% of the company’s shares, have in the past voted as a block, making it difficult to force a merger.
Yet without a return to rapid growth, analysts say, Yahoo could be ripe for a takeover.
A Viacom executive said that Chairman Sumner Redstone and Chief Operating Officer Mel Karmazin have met with Yahoo co-founder Jerry Yang about how to link the two companies without a full merger, possibly through an equity stake for Viacom. After losing millions on a failed Internet strategy and deciding to shut down its Go.com Web portal, Disney also is interested in Yahoo, according to sources at the company.
Media analyst Tom Wolzien of Sanford C. Bernstein & Co. believes that AOL Time Warner, with a $188-billion market value, will force other media companies to combine to compete. Some analysts predict that Yahoo or Microsoft, which operates third-ranked MSN, will cobble together large Internet service providers, including EarthLink, @Home, Juno and Prodigy, to challenge AOL.
EarthLink, the nation’s second-largest Internet provider after AOL Time Warner, has 4.7 million paying customers. The company would give Yahoo access to the same Time Warner cable systems that AOL has access to, for selling advanced services. To get regulatory approval for their merger, AOL and Time Warner agreed to lease space on their cable networks to other dial-up Internet providers, and struck the first pact with EarthLink.
Add Viacom or Disney to the mix, Wolzien said, and the triad could offer credible competition to AOL Time Warner.
But the entertainment giants could face a bidding war for Yahoo, analysts say. In that case, the deepest pockets may prevail.
“I have a feeling that [Microsoft] would be willing to pay a lot more than a traditional media company,” Blodget said. Microsoft declined to comment.
Growth would be the best takeover defense, and Koogle called the economic slowdown a good opportunity for Yahoo. “Our intention is to . . . actually take [market] share” from fading competitors, he said. The argument is buttressed by Yahoo’s $1.7 billion in cash. Yahoo says it will use that war chest to respond to new opportunities even in trying economic times.
“Yahoo is one of a very few Internet companies that, because of its scale, could remain a formidable player without a traditional media partner,” said Tom Rogers, chief executive of New York-based Primedia Inc., which owns magazines, television and Internet media. But to regain its luster, Yahoo “needs to figure out where its next level of growth will come from,” he said.
Yahoo garnered an impressive $1 billion in ad revenue last year. It might increase that total as the dot-com death spiral continues. But cannibalism has its limits: One-third of Yahoo’s revenue comes from other dot-coms, down from nearly 50% less than a year ago.
Koogle argues that Yahoo will increase the advertising pie by helping advertisers target the most lucrative audiences. But so far, such methods have not lived up to their billing, said Jim Rutherfurd, executive vice president of Veronis and Suhler, a media-oriented investment bank.
Advertisers are increasingly looking to combine interactive and traditional media placements, Rogers said. He wonders how well Yahoo will compete independently for advertisers against AOL Time Warner, which offers a panoply of Internet, magazine, broadcast and cable packages--and even product placements in movies.
Koogle says that such “cross-selling” sounds great but in practice has seen limited success. But he agrees that Yahoo must reduce its dependence on advertising and marketing services.
To that end, Yahoo has recently expanded fee-based offerings--from Web-site hosting to photo finishing. But inducing users to pay for formerly free Web services can be a challenge. Yahoo auction listings dropped 90% since early January when the company began to charge sellers a small fee, according to Downtown Magazine’s auction data Web site.
Auction fees merely filtered out frivolous sellers, which “raised the quality of the listings substantially,” Koogle said. “It increased the sell-through, which we also predicted.”
Yet during the same period, EBay Inc., which has always charged for auction listings, strengthened its lead, growing from 4.4 million auctions a week to 5.3 million, according to Downtown Magazine.
Yahoo’s customized Web services to large corporations show more promise, said Safa Rashtchy, an analyst at US Bancorp Piper Jaffray. He estimates that the company will earn $80 million to $90 million on corporate services this year--still a small fraction of ad revenue.
Of course, even if diversification efforts falter, the stock market could recover enough to again make Yahoo’s dowry too large for any suitor. And the company holds a trump card in any acquisition talks: human capital. Founders Yang and David Filo, among other technologists, are viewed as crucial to Yahoo’s success.
“The assets are both the platform and the people,” said Parekh, who is betting that Yahoo will beat the odds and remain independent.
Blodget agrees, comparing Yahoo’s predicament to that facing AOL in 1996. Heavily dependent on low-margin subscription fees, AOL was written off by many analysts.
“It was that harsh winter that hardened AOL,” he said. “Most great companies go through this period. . . . The weaker companies are weeded out.”
In a year or two, said the famously optimistic Blodget, Yahoo’s stock could again be in “triple-digit land.”
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Sign of the Times
Yahoo, once valued at more than $130 billion and expected to acquire other media companies, has fallen to the point that it is now a potential purchase target for its former peers.
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Yahoo’s stock price has plunged ...
Monthly closes and latest on Nasdaq
Wednesday: $23.81
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... collapsing its market value among media firms.
Microsoft: $314.8 billion
AOL Time Warner: $190.5 billion
Viacom: $86.8 billion
AT&T;: $86.5 billion
Disney: $64.4 billion
Liberty Media: $37.9 billion
News Corp.: $35.9 billion
Clear Channel: $34.4 billion
USA Networks: $17.2 billion
Yahoo: $13.3 billion
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What Else $13 Billion Can Buy
Here’s a sampling of bricks-and-mortar companies whose market capitalizations are near or less than the $13.3-billion value Wall Street now places on Yahoo:
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Company Business Market cap, in billions Sears Retail $13.7 Union Pacific Railroad 13.5 Harley-Davidson Motorcycles 13.1 FedEx Delivery services 12.1 Weyerhaeuser Lumber 12.0 Kellogg Cereals 10.8 Biogen Biotechnology 10.5 Avon Products Cosmetics 10.1
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Sources: Bloomberg News, Times research
