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28 March 2024

Not so much excitement for Yahoo!

Yahoo!'s 10-year deal with Microsoft will attempt to take users away from market leader Google. (GETTY IMAGES)

Published
By Dina Bass and Brian Womack

The honeymoon is over for Yahoo! Chief Executive Officer Carol Bartz.

Yahoo! shares, which had surged 42 per cent since Bartz took over in January, slumped 12 per cent on Thursday after the company agreed to outsource its internet-search business to Microsoft. Bartz, who had said she would only sell Yahoo!'s search unit for "boatloads" of money, struck an agreement that didn't include any upfront payment. The stock fell 3.6 per cent yesterday.

"It's a tremendous vote of no confidence in Carol Bartz," says Larry Haverty, a portfolio manager with Gamco Investors in Rye, New York. The firm manages about $20 billion (Dh73.4bn), including 1.6 million Yahoo! shares. "This is anything but a boatload of cash."

The agreement to offload Yahoo!'s search business, which generates about half its sales, represents Bartz's most important decision since she took over as CEO, says Heath Terry, an analyst at Friedman Billings Ramsey and Co in New York. Bartz became CEO after Yahoo! rejected a takeover offer from Microsoft of as much as $47.5bn last year, prompting an effort by investor Carl Icahn to replace co-founder and CEO Jerry Yang.

The complexity of the agreement means Google Inc may be able to extend its lead while Yahoo! separates its search unit from the rest of the company, says Colin Gillis, an analyst at Brigantine Advisors in New York. Web-search ads are one of the only parts of the advertising market that is growing. In the United States, sales of those ads will expand 13 per cent this year, while the market for graphical ads – Yahoo!'s other main business – will contract 4.6 per cent, according to EMarketer, a research firm in New York.

"There was a honeymoon period, but that's gone now," says Sameet Sinha, an analyst with JMP Securities in San Francisco. "I don't think people realised how deep the problems were at Yahoo!"

Investors were expecting Yahoo! to receive a lump-sum payment of $1.5bn to $3bn from Microsoft, according to Jeffrey Lindsay, an analyst at Sanford C Bernstein. David Garrity of New York-based GVA Research put the figure at $5bn to $7bn.

"Having a big cash payment upfront doesn't really help us from an operating standpoint," Bartz, 60, said on a conference call on Thursday. "As far as we're concerned, the boatload of cash is us preserving our revenue line."

Yahoo!, based in Sunnyvale, California, will keep 88 per cent of the revenue from Web-search ads on its own sites for the first five years of the 10-year partnership. The agreement will add $500m to Yahoo!'s annual operating income and save $200m in capital costs, the company said. Yahoo! expects the accord to boost its annual operating cash flow by $275m.

"The priority was not to do the deal," Bartz said. "The priority was to get the fog away from the company. Yahoo! got pegged as a search company and we're not a search company. Search is only one aspect of what our customers do."

The slump by Yahoo! on Thursday was the biggest since November 19.

Yahoo!'s shares declined because shareholders had flocked to the stock in the past several weeks, betting that a deal would happen, Bartz said. Some of them are now selling, she added.

Icahn didn't return calls yesterday seeking his reaction to the deal. Yahoo!

resolved his fight for control of the company last year by offering him three seats on the board.

Even though Yahoo! won't get an upfront payment from Microsoft, investors such as Victor Hawley say they appreciate what Bartz is doing to streamline the company.

"We still like her focus on costs and doing things that they've got strategic strengths in, and not wasting time on things they can't do the right job on," says Hawley, a portfolio manager at Reed Conner & Birdwell in Los Angeles.

His firm has about $1.5bn under management and owns about 1.6million shares of Yahoo!.

Bartz's arrival at Yahoo! in January was met with optimism by shareholders frustrated with the months of negotiations with Microsoft. The stock, which had fallen almost 50 per cent in 2008, rose 2.6 per cent on the day after she was named CEO.

"It's no secret that Yahoo! has faced challenges over the past year, but as I look around here today, I see a powerful global brand," she said on a conference call at the time. "Let's give this company some friggin' breathing room."

She announced plans this year to cut five per cent of Yahoo!'s workforce. Bartz also has shuffled executive ranks, putting the company's products and technology groups under the management of Chief Technology Officer Ari Balogh. She created a "wall of shame" for products she wasn't happy with, demanding that executives fix them.

In an April conference call, Bartz used a four-letter expletive to criticise the lack of engineering work being done at Yahoo!. That was followed immediately by an apology and an acknowledgment that she "knew that would slip out one of these times."

Microsoft CEO Steve Ballmer said in March that he had spoken with Bartz on the phone about a web-search deal and that the pair met in person. By April, the talks had intensified, with the companies discussing a partnership in web-search and graphical-display ads, people familiar with the discussions said at the time.

Microsoft Online Services President Qi Lu; Yusuf Mehdi, who oversees online marketing and business development for Microsoft; and Yahoo! Executive Vice President Hilary Schneider helped hammer out the final deal, Ballmer said on Thursday.

The agreement is less lucrative than Microsoft's June 2008 offer to acquire Yahoo!'s search business, says Danny Sullivan, editor in chief of Search Engine Land, a website in Newport Beach, California, that tracks the industry. In the proposal, Microsoft would have bought $8bn of Yahoo! stock at $35 a share and paid $1bn for the search business.

Bartz "was under pressure to make a deal," Brigantine's Gillis says. "But sometimes no deal is better than any deal."

 

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