Is Yahoo vulnerable to takeover?

In the first of an occasional series looking at big names that could be taken over, Simon Brew questions whether one of the oldest, most recognisable names in cyberspace may be about to change hands.

By Simon Brew, 20 Jun 2007 at 12:58

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If the recent removal of its chief executive and chairman Terry Semel was supposed to quash speculation as to the future of web icon Yahoo, then it only partially worked. After a brief share price rally, more cautious trading has ensued, and the ongoing chitter-chatter as to the future of Yahoo has, if anything been fuelled further. It seems that everybody is waiting to see what the next move will be.

For the truth is that Yahoo is vulnerable, and has been for some time.

The one-time darling of the early dot-com days had seemingly managed to ride out the impact of the subsequent market downturn, and had positioned itself firmly as a destination of choice for the web's user base.

Then Google happened. Or, more to the point, Google muscled in on areas that Yahoo had previously relied and banked on. The search engine business was only part of the story, of course. The real money came in the online advertising sector, and that's where Yahoo has, for a good year or two, been beaten and seemingly comprehensively outperformed by its sprightlier, seemingly unstoppable competition. And while Yahoo has launched a salvo or two of its own in that sector this year, it has being seen as too little, too late for its increasingly dissatisfied investors.

Semel's tenure was not one of failure. Certainly in the years after his appointment as chief executive and chairman in 2001, Yahoo enjoyed brisk business. Revenues, traffic and profit have dramatically increased over the course of his leadership, and financially, the company isn't in a bad place. While his hideously generous bonus packages - over $70m in 2006 alone - has caused loud dissent among shareholders (particularly given Yahoo's relative performance in its market sector), Yahoo is now established as a profitable and broadly known company. And given how some of its contemporaries have fared in a similar time frame, that's not an insignificant feat.

Yet it's not that or the balance sheet per se that's making Yahoo vulnerable. It's the share price. From the end of 2005 through to mid-2007, it's tumbled by the best part of 30 per cent, and this is at a time when its competition is thriving. Or, more to the point, the share price is struggling in a market that's not depressed.

Semel, who earned praise and plenty of financial reward for guiding Yahoo through the hard times, seemingly couldn't pull the same trick when the market was booming. And that suppressed share price, coupled with growing dissatisfaction at a strategy that seems to trail in Google's wake (and that's when said strategy is communicated at all), has meant that Yahoo may be ripe for the picking.

After all, the numbers don't lie. The market currently values Google at four times the price of Yahoo, and the gap is likely to get bigger.

Jerry Yang

The appointment of Semel's replacement has done little to douse the flames. Jerry Yang, who founded Yahoo back in 1994, has assumed the role of chief executive, and this is widely believed to be a holding position, rather than a long-term strategy. In fact, in some quarters the appointment of Yang has been seen as the most obvious signal yet that Yahoo is going to end up on the block (although, as you'd expect, some take the opposite view).