FACEBOOK and Google are the touchstones for Marissa Mayer’s all-new Yahoo, most recently evidenced by speculation that her company will make a venture investment in trendy disappearing message app Snapchat.
But Mayer could learn a lot from Hewlett-Packard (HP) too, even though the companies are in radically different businesses. One of the many cautionary tales to come out of HP is the damage done when a company protects a sacred cow for too long. For HP, it was hardware; for Yahoo, it is the company’s investments in Alibaba and Yahoo Japan.
When HP chief executive Meg Whitman decided to spin off the personal computer (PC) and printer business this week, she tacitly acknowledged that hardware was slowing down a company that should have gone aggressively into services and software years ago. But over the past decade, it depended on acquisitions and assertive cost-cutting to grow, while innovation and risk-taking fell by the wayside. It missed out on trends like mobility and the cloud; and it overpaid on deal after deal.
Through it all, HP relied heavily on hardware for stability, revenue and size.
The division made HP a huge company – it will be a $55 billion (R616bn) company after the spin-off – and it provided some cover for years of bad management. But its usefulness as a cushion lessened as margins narrowed and sales flatlined or declined, and the time and energy spent defending and expanding in hardware was bad for HP.
Leo Apotheker, who was chief executive until 2011 and built it into a $41bn business, understood that the company needed to let go of hardware, but he was a weak leader and his attempt to sell it failed.
Yahoo does not have hardware, but it does have lucrative investments in two Asian companies: the online retailer Alibaba and the internet portal Yahoo Japan. (Reports of a minority investment in Snapchat feel like an attempt to turn Yahoo into a tracking stock yet again.) My worry is that Mayer will focus too much on protecting those investments at the expense of Yahoo itself, and that the rest of the company will suffer.
HP’s hardware division isn’t a perfect analogy. Hardware is a shrinking industry, whereas Alibaba and Yahoo Japan have bright futures. But the Asian assets make Yahoo big and expensive to buy, just as hardware made HP big and unwieldy.
And if Yahoo’s core advertising business doesn’t perk up soon, those investments will lose their protective power. Should that be the case, investors will push Mayer to sell those positions little by little to pay out dividends and buy back stock to keep a howling pack of angry investors at bay. The protective buffer will shrink.
Alibaba’s shield started to deteriorate when the retailer went public in September and Yahoo had to sell half of its stake. Investors are already pushing it to sell its remaining 12.5 percent. They want Yahoo to return all of the cash from the sales in the form of dividends and buy-backs.
Meanwhile, there are various tales of a Yahoo sale flying around, in part related to the question of what to do about the company’s assets in Asia.
Hedge funds and banks are out there speculating that Japan’s Softbank wants to buy the portal. (It would be pretty hard to pull off, given that Softbank would then have a majority stake in Alibaba.) Some are hoping that Yahoo sells its Asian assets and uses the money to go private. Activist investment firm Starboard is pushing Mayer to break up the company.
It feels like Mayer is sticking her fingers and toes in the holes of a leaky dyke, but pressure to give shareholders the cash from Alibaba and Yahoo Japan is more than she can hold back. I say give them the money, create some shareholder goodwill and take that distraction off the table.
Then get down to the real, ugly work of a turnaround. That means lay-offs and shoring up digital and programmatic ads. It means figuring out why additional users from Tumblr haven’t increased advertising revenue, then fixing the problem or writing off Tumbler. It means being decisive about what Yahoo’s future businesses will look like, instead of hoping for an “aha” moment that saves the company.
History has shown that companies that wait too long to make painful changes to their asset bases get left behind when the world changes. And they often move too slowly to protect products that won’t serve them well in the future. HP, Dell, EMC – take your pick. Yahoo is struggling to find the next big thing, and clinging to the safety of its overseas investments won’t help.
Katie Benner is a Bloomberg columnist.