Yahoo
Yahoo shares, which had surged 42 percent since Bartz took over in January, slumped 12 percent yesterday after the company agreed to outsource its Internet-search business to Microsoft Corp. Bartz, who had said she would only sell Yahoos search unit for “boatloads” of money, struck an agreement that didnt include any upfront payment.
“Its a tremendous vote of no confidence in Carol Bartz,” said Larry Haverty, a portfolio manager with Gamco Investors Inc. in Rye, New York. The firm manages about $20 billion, including 1.6 million Yahoo shares. “This is anything but a boatload of cash.”
The agreement to offload Yahoos search business, which generates about half its sales, represents Bartzs most important decision since she took over as CEO, said Heath Terry, an analyst at Friedman Billings Ramsey & Co. in New York. Bartz became CEO after Yahoo rejected a takeover offer from Microsoft of as much as $47.5 billion 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, said 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 U.S., sales of those ads will expand 13 percent this year, while the market for graphical ads — Yahoos other main business — will contract 4.6 percent, according to EMarketer Inc., a research firm in New York.
Gone Now
“There was a honeymoon period, but thats gone now,” said Sameet Sinha, an analyst with JMP Securities LLC in San Francisco. “I dont think people realized how deep the problems were at Yahoo.”
Investors were expecting Yahoo to receive a lump-sum payment of $1.5 billion to $3 billion from Microsoft, according to Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. David Garrity of New York-based GVA Research LLC put the figure at $5 billion to $7 billion.
“Having a big cash payment upfront doesnt really help us from an operating standpoint,” Bartz, 60, said on a conference call yesterday. “As far as were concerned, the boatload of cash is us preserving our revenue line.”
Revenue Split
Yahoo, based in Sunnyvale, California, will keep 88 percent 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 $500 million to Yahoos annual operating income and save $200 million in capital costs, the company said. Yahoo expects the accord to boost its annual operating cash flow by $275 million.
“The priority was not to do the deal,” Bartz said yesterday in an interview. “The priority was to get the fog away from the company. Yahoo got pegged as a search company and were not a search company. Search is only one aspect of what our customers do.”
Yahoos 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 said.
Icahn didnt 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.
Not Wasting Time
Even though Yahoo wont 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 theyve got strategic strengths in, and not wasting time on things they cant do the right job on,” said Hawley, a portfolio manager at Reed Conner & Birdwell LLC in Los Angeles. His firm has about $1.5 billion under management and owns about 1.6 million shares of Yahoo.
Bartzs 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 percent in 2008, rose 2.6 percent on the day after she was named CEO.
“Its 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. “Lets give this company some friggin breathing room.”