Yahoo and its CEO of three years, Marissa Mayer, have been in the news a lot lately. While Yahoo’s checkered history and frequent changes in leadership have not done the company’s reputation any favors, it still has assets that could be valuable. With investors becoming impatient, Yahoo is apparently in play in a big way. Fortune reports that Starboard Value Fund’s Jeff Smith has launched a proxy fight against Yahoo and is expected to nominate a slate of directors to replace Yahoo’s board. Meanwhile, the New York Post suggests that Mayer is recruiting new investors herself, looking presumably for a few friendlier faces on her board. And amidst all this, a committee of the board has brought on advisors to help them assess their ‘strategic options’.
Disengagement: Part of life in the transient advantage economy
Yahoo’s situation is like that of many companies whose competitive advantages have gone into erosion. As a company reaches the end of their competitively valuable position, they face the need to pull resources out of once-successful businesses. It’s a process I call “disengagement” and it is just as important as creating new advantages, because clinging to an exhausted advantage is a long-run losing play.
In my book, The End of Competitive Advantage, I offer a typology of possible disengagement strategies, depending on how much time one has and how central the eroding properties are to the future of the organization. It looks like this:
What every company would like, of course, is the “orderly migration” path. This is where the old businesses are gradually shrunk, while the new businesses grow up to replace their revenue and growth prospects. Norwegian newspaper publisher, Schibsted is a great example. They moved very early to replace their classified ads with digital ads and have successfully transitioned much of their business. Today, Schibsted is thriving amidst disruptive forces that have undermined many of their publishing colleagues.
Attractive assets but anemic growth creates pressure on a CEO
Unfortunately for Yahoo, I think that they are now under intense time pressure, meaning the orderly migration option is not available. Many observers have said that Marissa Mayer has come to the end of her (rather long) honeymoon period.
The first issue, from a disengagement point of view, is that they don’t seem to have a good feeling for which of their assets are going to be core to the future business and which are not. They’ve flip-flopped from strategy to strategy for years (remember previous CEO Carol Bartz’s dramatic exit?). Really good people on the management side have left. Further, the board has hired McKinsey (and a bunch of other high-priced talent) to help them decide what to keep and what to jettison, which to me is never a good sign – it suggests that you don’t have faith in your senior executives to be able to make difficult, smart choices. In speaking with those who work at Yahoo, a certain kind of executive arrogance is described, and that’s never good culturally or for the business.
What options do they have?
I see three main directions, corresponding with the boxes in the table.
A “Hail Mary” move is similar to what Nokia did with its cell phone business. Nokia jettisoned a formerly core business asset to completely refocus on a new growth area. It sold the handset business to Microsoft (which wrote off $7.6 billion in short order). Then they bought Alcatel-Lucent to reinforce their position as a network operator and are now hunkering down to create a new set of core businesses. For Yahoo, such a move would be to get rid of some assets to double down on others – perhaps its Mavens business (mobile, video network and social Ads business). That strategy does imply that Yahoo would need to shrink.
So does the next approach, a fire sale, make sense? A fire sale is when a company sells off assets that are undervalued, but because of time pressure they can’t wait to get a better price. The interest in the company among private equity investors suggests that they might well have judged that Yahoo’s assets are deeply discounted. Fire sales can be made of parts of a company, or the entire thing, as often happens when investors take a once-public company private – as what happened with Dell. Dell didn’t feel the need to undergo their wrenching transformation of overhauling its once successful business under the quarterly glare of public questioning.
The last man standing strategy implies doing more or less what AOL did after separating from Time, Inc. AOL shrank the company to a set of niche offerings that generated cash, while expanding in areas that were high-growth categories. Verizon’s acquisition of AOL shows how such a strategy can pay off. AOL offered digital content and a sophisticated advertising platform that promised to help Verizon grow beyond simply being a ‘dumb pipe’. Indeed, there is speculation that Yahoo might make a nice fit for a company like Verizon that in addition to running a great network, they need to be able to sell services and more completely meet their customers’ needs.
Can Yahoo recover?
Well, I never say never and they do have very valuable assets in terms of brand, users, and content. I guess if I were in their shoes, the question I would be thinking about the hardest would be “how do we become indispensable to the user segments whose digital experiences we want to elevate?”