Yahoo!'s Paying More for Released Employees

Yahoo! (Nasdaq: YHOO  ) has had a tough go of things lately. Nearly every piece of good news the company reports seems to be overshadowed by a problem. This past May, for example, it was announced that China's e-commerce giant Alibaba would buy a 20% stake in its own shares owned by the Yahoo! for around $7.1 billion in cash and stock. That 20% is only half of Yahoo!'s position in Alibaba.

Yahoo!'s shareholders have been clamoring for years for such a sale. The company has held big chunks of both Alibaba and the similarly titled but separately listed Yahoo! Japan for years. Up until the May deal, Yahoo! held around 40% of Alibaba and nearly 35% of Yahoo! Japan. Last year, estimates placed the sale value of these holdings at around $11 billion to $18 billion -- which now looks conservative following the Alibaba divestment.

So that was pleasant, share price-driving news the market should have loved. But no. Instead, investors were too busy being annoyed by the company following the previous week's resignation of CEO Scott Thompson. The freshly appointed leader was forced to step down on the back of an unfortunate scandal involving an apparently fudged resume.

A ray of hope?
Yahoo! cleverly poached the very accomplished Marissa Mayer to be its new CEO. Not only had it nabbed a chief executive with a solid background in key aspects of the online business, but it also took away a big player from archrival Google (Nasdaq: GOOG  ) . Mayer was a longtime standout at that company, helping to design the layout of its iconic and now-dominant search engine.

Like the Alibaba sale, that should have been a nice power boost for the shares. But wham! -- here comes the news of the additional layoff charges. As usual for the company, bad fortune arrives close to good.

Yahoo! would probably be better able to weather these bad PR storms if its fundamentals were stronger. Back in the good old pre-Google days of the 1990s, Yahoo! was the name in online search. But then the Magicians of Mountain View came along and changed things to the point where "Google" is as much a verb as a company name these days.

And Yahoo! is far behind the pack it used to lead. In fact, strictly speaking it's not even a competitor at all -- in 2009 it reached a deal with Microsoft (Nasdaq: MSFT  ) for the Seattle-area company's Bing engine to power its search results. So apart from the interface and the branding, Yahoo! search is not really a Yahoo! product to begin with.

According to the most recent metrics from comScore, Google sites had a commanding 67% of the search-engine market while Microsoft was a distant second at 16%. Huffing and puffing at No. 3 was Yahoo!, with 13%.

Pink-slip time
Yahoo! is also staffed at bloated, 1990s dot-com-era levels. The company boasts an army -- er, workforce -- of around 12,500 people. That's a lot of manpower for not a lot of business. The Wall Street Journal compared the company's revenue per average employee with that of its rivals and found the numbers were out of whack. On the basis of 2011 results, Yahoo! produced only around $316,000 per worker. That figure for Google was a cool $1 million, while that for Facebook (Nasdaq: FB  ) stood at $1.4 billion -- although this isn't an entirely fair comp.

At the moment, Facebook has approximately 4,000 employees, or around one-third the tally for Yahoo! But its 2011 revenue of $3.7 billion was almost three-quarters that of the older company's $5 billion. So job cuts at Yahoo! seem to be an unfortunate necessity. It's just too bad the company didn't exactly get the financials right. Charges of $127 million have already been included in its most recent quarterly results; the company is circumspect about when the rest will be charged, stating only that it'll be sometime within the next year.

This is certain to make a dent in the bottom line in at least one of the upcoming quarters, no matter how Yahoo! spreads it around -- the company most recently netted a quarterly profit of $227 million. Contrast that with the extra $45 million to $75 million it'll have to put in the debit column between now and next July. Whoops, indeed.

Fool contributor Eric Volkman owns shares of Yahoo! and Facebook. The Motley Fool owns shares of Microsoft, Google, and Facebook. Motley Fool newsletter services have recommended buying shares of Microsoft, Facebook, and Google and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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