The Deal: Yahoo!

From September 19, 2007 Dealscape from the Deal:

Yahoo! Inc.'s M&A machine may be humming away, but is a spate of smaller deals enough to appease investors? The company announced a $350 million deal for e-mail software company Zimbra Inc. Sept. 17, days after a $5 million deal for news aggregation site Buzztracker, which came shortly after a $300 million deal for behavioral advertising technology firm BlueLithium Inc. In June, Yahoo! grabbed college sports site Rivals.com for $100 million.

The acquisition spree comes at a critical time for Yahoo!, with co-founder Jerry Yang back at its helm since the June departure of Terry Semel and under fire to boost its financial outlook. Trouble is, investors are restive, and some have argued larger deals could foretell growth, as
The Deal's David Shabelman writes:

Yahoo!'s shares have risen of late on rumors of a potential buyout of the company by, among others, online auction giant eBay Inc. of San Jose, Calif., or Microsoft Corp. of Redmond, Wash., although no acquisition appears imminent. Yahoo!'s stock price rose last week after an analyst at Bear, Stearns & Co. named the company a "top pick" for the next 12 to 16 months. "Yahoo! will continue to be a takeover target for the next few years, and that will be the leading driver in the stock rather than any operating results," Karbasfrooshan predicted.

Rewind to June. After drawing shareholder fire for his generous compensation package and the company's financial performance, Semel stepped down June 18, and Yang stepped in to replace him. The board also named Susan Decker, the former head of Yahoo!'s advertiser and publisher group, as president. What's next for Yahoo! is a question analysts kicked around the next day and remains relevant months later.

Should Yahoo! be the acquired, analysts told Shabelman and The Deal's Kate Gibson at the time Microsoft, with whom Yahoo! previously discussed a merger, topped the list, while Viacom Inc., News Corp. and Comcast Corp. could move to acquire the company outright or stake partnerships.

One suggested Microsoft could spin off its MSN portal and Live search products to Yahoo! in exchange for a large stake in the company or that News Corp. could do likewise, spinning off its Internet properties, which includes social networking pioneer MySpace.com, for a Yahoo! stake. Further, some suggested Yahoo! could orchestrate an acquisition of its own, along the lines of social networkers Facebook Inc. or Bebo Inc., or professional social networker LinkedIn Corp.

Separately, Nollenberger Capital Partners senior analyst Todd Greenwald told The Deal's Stacey Higginbotham the management change suggests Yahoo! plans to remain independent:
"I don't think there's a deal around the corner because if there is going to be a deal Terry would be a better CEO for that job than Jerry would be," he said. "Terry has the experience and could have brokered a deal with a media company like News Corp. or Time Warner [Inc.] If there were any talks at all going on, Terry would have stayed on and seen that through before riding off into the sunset."

SHAREHOLDER ACTIVISM GOES WEB 2.0

The June news came nearly one week after the company's annual board meeting saw significant shareholder resistance, as much as 30% in one case, to the board's candidates, though they were all elected. Ahead of the meeting, the company drew criticism from Web 2.0-inclined activist shareholder Eric Jackson.

The minority investor used social networking to argue his case, with tactics including a blog, a MySpace.com account, a LinkedIn site and YouTube videos of himself, in an effort to rally shareholders as he called for the ouster of Semel.

Jackson took issue with Semel's compensation package, out of line with stock performance.
At the time, Shabelman pointed out, Semel's fate could have rested less with angry shareholders than on Yahoo!'s new Panama search platform, aimed at putting more relevant advertising in front of users. Having launched the platform in February, Yahoo!'s second-quarter results to be announced in July should be telling, he wrote.

WAVES OF CHANGE

The management shift is the latest for the transitioning company and follows the departure of chief technology officer Zod Nazem, who had a crucial role in developing Panama, a month earlier. At the time, the move raised questions about Panama falling short of expectations, Shabelman wrote.

Nearly two weeks after The Wall Street Journal reported Yahoo! was considering linking up, via merger, with Microsoft, the company landed a new CFO, Blake Jorgensen, a Thomas Weisel Partners LLC co-founder who could help drive some M&A activity, Shabelman suggested in May. M&A fuel or not, his experience will be an asset to the company, which is not lying down among fierce competition from Google Inc. and Microsoft itself.

The Microsoft news came a year after talks between the two fell apart. The Sunnyvale, Calif., company has been rejiggering itself, through product launches and grabbing small and midsize Internet companies for its arsenal and assault against its archrivals. One of its larger deals to date, Yahoo! said April 30 it would pay $680 million for the 80% stake it did not already own in Right Media Inc. in hopes of bolstering ad sales. The deal came two weeks after Google acquired DoubleClick Inc. for $3.1 billion.

Four months earlier, Yahoo! kicked off 2007 with the launch of its upgraded Web-based applications, including its search service, oneSearch, and the acquisition of MyBlogLog.com, a social network built around blogs, which a Yahoo! exec confirmed — via blog — late Jan. 8. The news came about a month after the company launched a corporate shakeup of sorts after an internal memo likened its operating structure to peanut butter on bread — spread too thin, and further, too bureaucratic, according to The New York Times.

Daniel Rosensweig took his leave after three years as chief operating officer, as did one-time NBC exec Lloyd Braun, who led the company's media operations. Yahoo! said it would realign itself into three units focused on: audience; advertisers and publishers; and technology. Decker, the company's then-chief financial officer, moved to head the advertising and publishing group, raising speculation at the time, the Times said, about her positioning to succeed Semel, with Rosensweig out of the picture.

Leading up to the announcement, the company made a series of moves to make up for some areas in which it has been dragging, one being advertising.

In November, Yahoo! announced striking a partnership with at least seven U.S. newspaper companies to lend its advertising and search technology to their collective crop of Web sites that are home to 150+ dailies. The news came weeks after Yahoo! sparked buzz as it readied its next-generation search platform, due out in early 2007, but which analysts told The Deal would never surpass Google's. It also came on the heels of Google's plan to dabble in offline newspaper ads, offering advertisers already using its online services, participation in a three-month pilot program for print advertising. In August, Google also said it would lend its search advertising technology to eBay Inc. for the e-tailer's non-U.S. advertising needs. Even still, Yahoo! doesn't look poised to shy away from a challenge.

PAYING DEARLY

To fuel the two-armed expansion — international and offering-wise — Yahoo! has made a series of acquisitions and taken stake in what it sees as key markets, paying top dollar and lining the pockets of its venture capitalist friends and neighbors.

Earlier in November, Yahoo! acquired polling Web site Bix.com for undisclosed terms. According to BizJournals.com, Bix previously raised $6.77 million in a Series A round of funding from investors that included Palo Alto, Calif.-based Sutter Hill Ventures and Trinity Ventures of nearby Menlo Park, Calif., The Deal's Cheryl Meyer pointed out at the time of the sale to Yahoo!.

In October 2006, the company bolstered its online advertising holdings, acquiring AdInterax, as well as a 20% stake in Right Media through a $45 million Series B venture round.

On June 7, 2006, Yahoo! announced swapping $60 million for 10% of South Korean auction site Gmarket Inc. The deal provided a partial exit for Oak Investment Partners, which, according to one South Korean press report, paid $7.6 million in 2004 for a 34% stake.

In December 2005, Yahoo! scooped up Del.icio.us Inc. for an undisclosed amount, reportedly between $17 million and $19 million, allowing an exit for VCs Union Square Ventures and BV Capital along with Amazon.com Inc. and Netscape Communications Corp. co-founder Marc Andreessen, among others.

Also in 2005, Yahoo! grabbed 40% of China's e-commerce heavyweight Alibaba.com Corp. for a cool $1 billion, which landed Granite Global Ventures, virtually unheard of until then, on the map, giving its portfolio company a $4 billion valuation. GGV wouldn't say how frothy its return was, but generally makes investments between $3 million and $8 million. Its Alibaba.com investment was no different.

The company also has its name all over the online auction arena in Taiwan and Japan with Yahoo! Taiwan and Yahoo! Japan.

WE CAN DO THAT, TOO

Ramping up its product offerings to compete with Eastman Kodak Co.'s EasyShare and Hewlett-Packard Co.-owned Snapfish, Yahoo! grabbed popular photo-sharing service Flickr in 2005 — for undisclosed terms, but reportedly $25 million — and announced launching Yahoo! Photos on June 8, 2006, offering users such features as the ability to send photos over instant message and drag-and-drop for easy organization. Just days before, Yahoo! announced launching Yahoo! Video to go up against megapopular YouTube, with some of the same elaborate features as
Yahoo! Photos like tagging for easy browsing.

Other products, too, target the competition. Launches in 2006 include:

AT&T Inc. and Yahoo! joined forces to offer Internet-based phone services in April.

The company added a map function for travel planning, also in April.

Yahoo! teamed up with IBM Corp. to enhance its instant message capabilities in January.

The company also said in May that it had aligned itself with megacompetitor eBay to share the U.S. auction market.

And in 2005, Yahoo! debuted Yahoo! 360, where users can build a blog and a homepage.

—Carolyn Murphy

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