Sunday, August 15, 2010

Five Ways Yahoo! Could Redeem Itself

By Eric Jackson
RealMoney Contributor

8/13/2010 11:25 AM EDT
Click here for more stories by Eric Jackson

Yesterday I read a fantastic analysis of the reasons Yahoo! (YHOO - commentary - Trade Now) has been stuck in the mud for 12 years now. The piece was authored by Paul Graham, who once sold his start-up to Yahoo! and then spent time working for the company.

Graham points out that Yahoo! has had a couple of particularly fatal flaws over the years.

First, the company made too much money from the likes of Procter & Gamble (PG -commentary - Trade Now) and Internet startups with dumb venture-capital cash as they were overpaid for worthless banner ads. Why innovate with something like AdWords when you're making stupid money?

The fact that it was doing so well in the early days, ventures Graham, is why it never felt compelled to seriously develop search (or to buy Google(GOOG - commentary - Trade Now), for that matter), as this seemed like such a small market compared to that of Internet portals.

Another point Graham makes is that Yahoo! never wanted to be a technology company -- and, as such, it brushed off hardcore technology types who were, in turn, were never compelled to stay at the company.

Graham's piece does shed some light on what the thinking in Sunnyvale, Calif., has been for more than a decade now. Still, it's sort of like understanding the logic of a drug addict. How do you make sense of nonsense?

We all know that Yahoo! slipped into Alice in Wonderland some time ago. It used to be that people speculated about what Yahoo! needed to do to turn itself around. Now, with Carol Bartz on the job, you don't hear even that -- just apathy and more Yahoo! people quitting.

So, what are the things that an investor should look for as signs that it's time to enter a long position in the stock?

  • A revamping of the board. Following the shameful rejection of Microsoft's (MSFT - commentary -Trade Now) $34-per-share buyout offer a couple of years ago, it will only be safe to own the stock again once all the directors responsible step down, in my opinion. Until then, I think Roy Bostock, Art Kern, VJ Joshi, and Gary Wilson, and Eric Hippeau should be reminded that they have embarrassed themselves with their out-of-touch actions.
  • Clarity on what this company is and what it wants to be. Carol Bartz has been asked this question at least twice over the past year, and she's provided miserable responses. She may be a cost-cutter, but she has no clue what she's trying to build at Yahoo!. It's perfectly fine if she just wants to do a little bit of this and a little bit of that, but she should state that clearly instead of letting people guess.
  • ....

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