In July of 2012, Marissa Mayer became the Chief Executive Officer of Yahoo! Inc. (YHOO), and has changed the company’s culture with lightning speed. Having begun her career at Yahoo!’s main competitor as a web portal, Google (GOOG), she oversaw the development of a number of well-known products and site designs. Her appointment as CEO was seen as a bold move for Yahoo!, which had been losing ground to rivals such as Google, which has taken over the lion’s share of the search engine market, and social-networking site Facebook (FB). Due to both loss of market share and the decline of advertising revenues in the years since the recession of 2007-2009, Yahoo!’s revenues have dropped off substantially since their 2008 peak. Getting squeezed out of its core businesses, the company likely realized it was time for a drastic change.
With this backdrop in place, the company has given Mayer license to significantly alter the company’s strategy. The first major shift was to retain some of the proceeds of Yahoo!’s stake in Alibaba, a large Chinese e-commerce company, instead of putting all of the capital towards share repurchases or dividend payouts, as had been previously planned. She also began implementing some policies that she had found effective at Google, and made provisions for Yahoo! Employees to be given new smartphones to replace their outdated Blackberries.
But the real change has been Yahoo!’s recent flurry of acquisitions. The most high profile of these has been the $1.1 billion acquisition of Tumblr, a popular blogging site with over 100 million users and hundreds of millions of visitors each month. It is particularly popular with the much-sought-after 18 to 24 year old demographic, which is key to Mayer’s mission to shed Yahoo!’s image as a stale holdover from the early days of the Internet. However, despite the massive base of users, Tumblr only brought in about $13 million in revenues last year, largely due to its resistance to putting advertising on the site. This flies in the face of Yahoo!’s business model, which is largely based on advertising revenue. Tumblr founder David Karp has insisted that the partnership with Yahoo! will help Tumblr focus on advertising that enhances the content and quality of the site, rather than simply plastering blogs with ads. In turn, Mayer has assured users that Tumblr will remain firmly under Karp’s management. Indeed, many worry that a clumsy attempt to quickly “monetize” the platform would damage Tumblr’s image and lead many users to abandon the site.
It would be a mistake to focus on immediate revenues to determine the value of the deal to Yahoo!. With minimal debt and working capital of over $4.3 billion at the end of 2012, the Tumblr acquisition posed virtually no risk to the balance sheet. Meanwhile, it may lay the groundwork for Yahoo! to expand in two key areas; social networking and mobile use. Mayer has made it a priority to get the company’s sites to be persistent players on every Internet user’s device. With mobile devices such as smartphones and tablets making up an increasing share of Internet use, online search and content providers need to adapt to the different habits of users of these devices. Yahoo! claims that most of Tumblr’s users sign on through its mobile application. That could vastly increase Yahoo!’s user base and Web traffic right away, and part of the philosophy that Mayer has brought from Google is that in the long term, revenues in its industry only come from increasing the number of views and interactions that take place on the company’s sites.
There acquisition has the potential to be a win-win situation. Tumblr has a very small sales team relative to the size of its user base, and Yahoo!, which is aggressively looking to expand its user base, has a long-standing online advertising-based business model, and thus a big and experienced salesforce.
While many may recoil at the valuations that Yahoo! is paying for some of its acquisitions, that has long been a hallmark of Web content providers, particularly those that depend on advertising revenue. Examples such as Facebook’s purchase of Instagram and Google’s acquisition of Youtube help to illustrate that even in cases where the acquisition price is staggering relative to revenues and earnings, the end result may be an excellent addition to the company.
While there will continue to be arguments over Mayer’s moves at the company, one thing is certain; Yahoo! is back on the map in a way that would have been difficult to imagine a year ago. Since Ms. Mayer’s arrival as CEO in July of 2012, YHOO’s share price, which had been stuck in the low teens for most of the time since the financial crisis of late-2008, has finally gained traction and is now in the mid-20’s, a sharp increase for one year. More importantly, Yahoo! is becoming a force to be reckoned with in social media, video content, and mobile applications. It may take a long time to see whether Ms. Mayer’s efforts bear fruit for YHOO shareholders, but it is already apparent that after many years in the doldrums, Yahoo! has become a company to watch again.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.