January 25, 2017    4 minute read

Why Yahoo is Searching for a Lodestar

Light on the Verizon    January 25, 2017    4 minute read

Why Yahoo is Searching for a Lodestar

Yahoo, a giant in the technology industry which provides internet search tools, communications, and various other digital content, has tumbled in the period after the appointment of CEO Marissa Mayer, who attempted to drag the company out of the chasm. Looking back at Yahoo’s history, it was impressive – yet their loss was inevitable.

Two factors caused the failures of Yahoo: big leaps in acquisitions starting in the dot-com bubble, and a lack of innovation. Although its core business is being taken over by Verizon Communications, a leading telecommunication company that is also America’s biggest mobile operator, the future of Yahoo is rather pessimistic because of the serious data breach issues which weaken its bargaining leverage.

The Rise and Slump of Yahoo

Founded in 1994 by David Filo and Jerry Yang, Yahoo rose rapidly with huge numbers of clicks and users, bringing its business potential into light. The dot-com bubble lasted from roughly 1995 to 2001, with stock prices peaking at nearly $110 per share and ending with a burst. Though one of the fortunate survivors, Yahoo still suffered a shock and its stock price tumbled.

While competing against major players in the market such as Google, Yahoo had to respond by altering their strategies accordingly – as seen, for instance, in the upgrade of Yahoo! Email accounts’ memory space from 4 MB to 1 GB per user, responding to the release of Gmail by Google, or the emergence of Yahoo! Messenger as a rival to Google Talk.

Platform development and expansion in its range of services did not boost Yahoo’s revenue, but deteriorated its liquidity and added pressure to the company overall, as signified by low returns at the time. As shown in the picture below, the trend in its post-dot-com bubble share prices is exanimate.

RiseAndFall of Yahoo

Source: Factset

Low-value Acquisitions

As alluded to above, Yahoo spent a portion of its liquidity acquiring companies in order to expand the service range of its platform. Following the acquisition of Net Controls in September 1997, its first deal ever, Yahoo turned obsessed with acquiring companies in different fields, as derivatives to hedge risks and as weapons against competitors.

This mania did not stop even after Marissa Mayer (a former Google executive and Walmart corporate director) came on the stage. With outflows of roughly $2bn, 53 internet startups were acquired by Yahoo after that point, including Tumblr, Ztelic, and Rockmelt. Compared to Google’s acquisitions in the same time period, Yahoo’s relatively low-value game threw them off the leaderboard.

Although it still has cash in its pockets, Yahoo arguably failed to practice profitable strategies and properly use its resources. Moreover, between 2005 and 2007, Jerry Yang mistakenly passed on a merger attempt by Microsoft – which could have been a brilliant turning point for Yahoo – even after Microsoft raised the merger price by $5bn, up from the original $44.6bn. The rejection damaged stock prices and harmed stock shareholders’ interests. Loss of trust is critical. Jerry Yang’s decision will be seen as one of the poorest ever judgments in the industry.

Into the Future

Marissa Mayer saw little return from lifting the company’s situation after a memorable 4-year-devotion to Yahoo. The Yahoo’s hopes turned to the possibility of being acquired by Verizon as a subsidiary. It seems an imprudent decision on Verizon’s part to acquire Yahoo, since it will not bring in any valuable resources.

Yahoo’s foundations were poorer than Verizon prior to this acquisition, and anything it carries to the telecommunication giant could become a burden. The data breach scandal which caused Yahoo to lose massive amounts of client account information has further weakened Yahoo’s bargaining power on the acquisitions prices.

A billion-dollar-cut seems like a marvellous deal to Verizon, yet the risks and uncertainties associated with Yahoo have left a huge question mark behind this forthcoming action. Facing its largest challenge ever, Yahoo desires a saviour – but whether Verizon can handle this role or not is still unknown.

 

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