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Yahoo! lacking CEO–and investor confidence

Mar 12, 2001  •  Post A Comment

Everyone’s favorite Internet target for a merger with a traditional media company saw its future turn cloudier last week.
Yahoo!’s stock plunged to new lows on news that it will dramatically miss its revised advertising revenue and earnings targets, while its CEO, Tim Koogle, said he will leave his post.
Mr. Koogle said he will spearhead the search for his successor as CEO while remaining chairman of the company.
Yahoo’s fierce independence and near sole reliance on advertising-in the worst advertising lull in a decade-is what brought its once $230-a-share stock to $17-a-share lows last week.
Experts say the Yahoo! franchise and its 185 million global users are valuable and rare, and can be leveraged to fiscal prosperity. But, as J.P. Morgan analyst Paul Noglows said, “The rebuilding process will be slow” and will depend on the management, new business and even ownership contributions from more traditional media players.
But Internet-weary media moguls aren’t yet jumping at the chance to rescue and align with the struggling company. Wall Street sources say Yahoo!’s stock price would have to dip below $10 a share before mass media conglomerates such as Viacom, The Walt Disney Co. or Vivendi Universal would be interested in bidding for all or part of the Internet giant. Even its new $17-a-share low represents a hefty $11 billion market capitalization.
Still, sources say Viacom President Mel Karmazin and Chief Yahoo! Jerry Yang have discussed ways their companies can work together. Yahoo!, Viacom and other interested companies declined comment.
“From a strategic standpoint, Viacom is not a complete company yet,” said Tom Wolzien, analyst at Sanford Bernstein. “You’ve got some other players sniffing around now. Vivendi has shown some interest, although I don’t believe Disney would step in given its Internet experiences of late.”
Holding to his Feb. 2 report to clients, Mr. Wolzien contends Yahoo! could resort to a three-way alliance with Viacom and EarthLink in a bid for parity with AOL Time Warner. EarthLink’s high-speed Internet service provider agreement with Time Warner would ensure access to a proprietary version of Yahoo! and Viacom’s Showtime premium movie service for Time Warner’s 12 million cable subscribers.
Such a merger would provide Yahoo! much-needed dual revenue streams and Viacom online platforms across which to cultivate content, services and customers.
“Besides AOL’s short-term success in advertising, the principal difference between AOL’s online operations and Yahoo!’s is that AOL always has had two revenue streams,” Mr. Wolzien said.
Last week, AOL Time Warner announced the lastest of seven new cross-platform marketing deals in which major advertisers such as Continental Airlines and Kinkos have committed advertising in the company’s magazines, TV and Internet media. Collectively, these pacts will generate $100 million in ad revenues.
By comparison, Yahoo! last week said it was committed to breaking even in the first quarter and in fiscal 2001 (after several years of profits), despite the fact that it expects first-quarter revenues to fall at least 45 percent below estimates from five months ago.
Based on previous company guidance, analysts had been expecting as much as $240 million in first-quarter revenues and earnings of 4 cents to 7 cents per share.
Analysts now say Yahoo! will be lucky to clear $800 million in revenues this year and that earnings per share could range from zero to 10 cents. Yahoo! has backed off its previous full-year guidance of 33 cents to 43 cents per share in earnings on $1.2 billion or better in revenues, but has not set new targets.
Only a meager 20 percent of the $170 million to $180 million in revenues Yahoo! is now promising in the first quarter will come from new Internet ad business. The company said it has $117 million in deferred ad commitments that will apply in this quarter.
In the meantime, things are likely to get worse before they get better. Analysts, some of whom further downgraded the company last week, expect Yahoo! soon to announce dramatic layoffs and other cost-cutting measures. It will use its $2 billion in cash reserves and strategic alliances to quickly launch new subscription-driven services in areas such as personal finance, entertainment and sports.
Yahoo! recently has tried to begin charging users for previously free services such as auction listings-a move users have repelled.
However, Fred Moran, analyst at Jefferies & Co., said aligning with a third-party content aggregator could alienate or jeopardize Yahoo’s standing relationship with thousands of other content providers.
“There are no guarantees that a new CEO or a joint venture from the traditional media ranks will solve Yahoo!’s problems when we’re talking about a 28 percent downward revision to our top-line forecast and a 69 percent reduction in our EPS forecast,” Mr. Moran said.
AOL Time Warner Co-Chief Operating Officer Bob Pittman, pegged to one day head the media giant, was mentioned in speculatory circles as a top candidate for the Yahoo! CEO post, but industry experts say it is unlikely Mr. Pittman would leave AOL Time Warner. Mr. Pittman denied he would entertain such a move.
Industry sources question Yahoo!’s internal stability, noting that the Yahoo! board has passed over its own president and COO, Jeff Mallet, for the CEO post, perhaps in deference to the growing rift between Mr. Mallet and Mr. Koogle over how the company should be run. Yahoo! also recently suffered resignations of key managing directors at its Asian, European and Canadian operations.