Yahoo! (Nasdaq: YHOO ) shareholders want answers. Unfortunately, they're only walking away with even more questions.
CEO Jerry Yang joined Chairman Roy Bostock yesterday in updating investors on the recent turmoil at the company. That would have been a great time to address owner concerns over freefalling share prices and executive defections. Instead, the company sidestepped those issues to sing the praises of its ad-outsourcing pact with Google (Nasdaq: GOOG ) , and to throw some light on how it blew the deal with Microsoft (Nasdaq: MSFT ) .
Investors won't like the explanations.
G is for Google -- and Gullible
The AdSense deal with Google "will generate approximately $250 to $450 million in incremental operating cash flow for Yahoo! in the first twelve months following implementation," explained Yang and Bostock.
Sounds good, right? Dig deeper. It's an admission that Yahoo! stinks at paid search. Why else would Yahoo's cut from a Google deal be more than all of what Yahoo! can clear on its own? There's no sugarcoating that. Or is there?
"The net result is that the agreement helps us accelerate one of our strategic aims -- closing the monetization gap," the letter explains. "At the same time, it allows Yahoo! to continue to compete aggressively in search and display advertising."
What? Yang isn't just trying to portray his company's surrender to Google's paid-search charms as a Yahoo! achievement in "closing the monetization gap." He's also saying that Yahoo! still naively wants to pepper its search results with its own ads.
Don't get me wrong. Yahoo! is making headway in display advertising, so there is no reason for it to yield to a rival there. However, its insistence on continuing to sell its own sponsored search results is delusional from the perspective of the executive boardroom, while also shortchanging its shareholders by failing to maximize profits.
By allocating some of its ad inventory to serve alongside Google's targeted text ads, the company hopes it can keep that channel open. The thinner demand may even drive up click prices -- but how can it not have an impact on supply? Advertisers will now know that they can simply buy spots through Google if they want to appear on both search engines. That hardly makes Yahoo! the "must buy" for sponsors that the company envisions its platform to be.
It also cheats the bottom line. If scrapping its paid-search business completely in favor of Google would deliver even more cash flow, why is Yahoo! kidding itself with its slow-motion euthanasia of its own Panama paid-search platform?
M is for Microsoft -- and Misplayed
Yang and Bostock also detail the botched Microhoo hookup. The letter recounts several meetings between the two companies, culminating with the June 8 breakup, when "Microsoft stated unequivocally that it has no interest in acquiring all of Yahoo!, even at the price range Microsoft had previously suggested."
We get it. It was Microsoft's decision to walk away ... but only after Yahoo! shook its head for more than four months. The burden rests with Yahoo! to explain why its stock is trading roughly $10 lower than Microsoft's original buyout offer, but the company's somehow casting itself as the victim.
The letter explains that Microsoft countered with a proposal to buy only Yahoo!'s search business. It would pay $1 billion up front, invest another $8 billion in Yahoo!, and grant Yahoo! a piece of the action for 10 years of exclusivity. However, nowhere in the letter does it actually spell out whether this would have created more -- or less -- than the incremental annual cash flow improvement it will be getting through Google.
Yahoo! only explains that the exclusivity was a problem, even though everyone but Yahoo! seems to understand that once you go Google, you don't go back. Just ask Time Warner's (NYSE: TWX ) AOL.
I is for Icahn -- and Innocent
The letter closes by defending itself against Carl Icahn's proxy battle. "Based on Mr. Icahn's narrow agenda, it seems highly unlikely that either he or his slate would bring added value to Yahoo!."
Added value? The current board's indecision with Microsoft has actually subtracted value for Yahoo! shareholders. I'm not entirely a fan of Icahn's actions here, but the letter's insistence that the current board "has the independence, experience, knowledge and commitment to navigate the Company through the rapidly-changing Internet environment, execute on our strategic objectives and deliver value for Yahoo! and its stockholders" is just too funny to take seriously.
Is Yahoo! really that out of touch? This letter should have explained the prolific defections and the tumbling stock. It should have explained the Google and Microsoft paths on an apples-to-apples basis. It should have been modest enough to own up to its fiscal and board shortcomings.
It failed on all counts. But what else is new?
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