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Yahoo’s Turnaround May Be Made in China

Yahoo’s new CEO Marissa Mayer doesn’t have much time to get the company back on track. And much depends on Chinese stock valuations.

Some analysts are expecting wonders, or at least the nearest thing, from Yahoo’s new CEO, Marissa Mayer, the fifth chief executive to lead the troubled Internet company in as many years. The fact that Mayer is a geeky product engineer from Google has added to her appeal. She led blockbuster projects like Google Maps and Location Services.

“The appointment of Marissa as the CEO of Yahoo should improve employee morale and sentiment, now that you have a new high-profile, product-focused CEO,” says Anthony DiClemente, a New York–based managing director at Barclays.

Adds Citigroup’s analysts in a recent report: “We have high regards for Ms. Mayer’s organizational skills, consumer Internet industry knowledge and her ability to focus efforts of a large team of engineers on product innovation.”

But Mayer faces huge challenges, ranging from a need to recruit new executives and assuage disgruntled workers to extracting and allocating the proceeds from the partial sale of a controversial investment in a Chinese e-commerce company.

She has made a start on new executive hires, having recently lured Kathy Savitt away from her e-commerce start-up Lockerz to serve as chief marketing officer. Next on Mayer’s executive radar may be Rich Riley, who left Yahoo when former executive Scott Thompson departed in April but whom Mayer reportedly hopes to hire back.

Mayer is also currently reviewing the company’s capital structure, which includes purportedly gigantic, after-tax cash proceeds from its Alibaba sale. In May, under interim CEO Ross Levinsohn, Yahoo agreed to sell half of its 40 percent stake of the e-commerce company. It expects to receive over $6 billion in cash.

That comes after years of wrangling with the Chinese firm that culminated in a conflict that last year “reached soap opera proportions,” in the words of the New York Times, because Alibaba failed to tell its largest investors, Yahoo and Japan’s SoftBank, that it had spun-off its payment processing platform due to new domestic government regulations.

The $6 billion, if it comes to that, could go a long way to mollify some investors.

The question is how much of it Yahoo should keep on hand for acquisitions or R&D and how much to use to buy back stock. And the lack of clarity over a recent announcement that $5 billion would be used to repurchase shares has upset some analysts. Jordan Rohan of Stifel Nicolaus lowered his rating from “buy” to “hold” in an August 13 report, citing an unclear turnaround strategy, potentially dilutive acquisitions and a reduction in Chinese Internet equity multiples, with reference to Alibaba.

Even Barclays’ DiClemente expresses some concern here. “The review is somewhat disconcerting because it casts some doubt on the likelihood of the $5 billion buyback plan,” he says.

Part of the uncertainty stems from the fact that falling Chinese Internet multiples call into question the amount of cash Yahoo will eventually receive, especially given the lack of clarity as to the value of Alibaba.

“The feedback that they were getting from certain shareholders was that they have these valuable Asian assets, but they’re not consolidated. It’s hard for us to see the performance of them. Investors, as a result of the opaque nature of those assets, were not capitalizing at very high multiples,” continues DiClemente.

In addition, investors such as Dan Loeb’s Third Point hedge fund expected more of whatever proceeds Yahoo got for the shares of Alibaba to be returned to shareholders.

“There was this movement, which was punctuated by the activism of Third Point to go out and monetize the Asian assets for the purpose of returning proceeds to shareholders,” says DiClimente. “That’s why the prospect of them not returning capital to shareholders is surprising,” he says.

Loeb nonetheless recently told Reuters that he supports Mayer’s reassessment. And Sameet Sinha, an analyst at B. Riley & Co. in San Francisco, contends that it’s in-line with a change in course after Mayer’s hire.

Mayer’s challenges don’t end here. She must also stem a tide of departing executives. While she has made some high-profile hires, others, including Wayne Powers, a New York–based senior vice president of North American sales; Adam Bechtel, head of infrastructure architecture; and Marc Grabowski, a vice president of North American media sales, have left. 

So far, most investors seem skeptical that Mayer can turn the company around, having pushed the company’s stock price down from roughly $16 to under $15 since her hiring on July 16. They at least can draw some reassurance from the fact that the cost of failure could be considerable for Mayer. While she has a $70 million, five-year pay package, former CEO Carol Bartz, who was forced out last year, had to give up her unvested 2009 performance-based restricted stocks and options. Mayer will want to avoid the same fate.

Can Yahoo compete with Google under Mayer? “Certainly,” says Sinha. “She won’t have a long time to prove it. By 2013 there not only has to be a strategy laid out, but she will also have to had taken the initial steps on executing it successfully.”

Mark Stoeckle, CIO of US Equity and Global Sector Funds at BNP Paribas Investment Partners in Boston, says much depends on Yahoo’s ability to grow its core business, search. Stoeckle sees opportunities there in mobile technology but notes that Google leads in mobile as well as other platforms. “There is still time to catch up, but it will require awesome user experiences and aggressive monetization," says the analyst.

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