Yahoo CFO Aims to End Buy-High, Sell-Low Record on Deals
“You’ve seen our track record on M&A, with buying really high and selling pretty low,” Morse said in an interview. “We’ve got to be careful.”
Appointed finance chief a year ago, Morse says he intends to improve the return on invested capital, a measure of how profitably Yahoo is spending, to 18 to 24 percent in 2013 from about 5 percent in 2009. To do that, Yahoo will shun high-priced targets that don’t fit with the company’s strategy, Morse says.
Yahoo, the second-biggest U.S. search engine, agreed to sell its HotJobs website for $225 million in February after paying about $436 million for it in 2002. In January, Yahoo sold Zimbra, an e-mail and collaboration unit, netting $100 million. Yahoo bought it in 2007 for $350 million.
Acquired companies will have to help Yahoo meet profitability targets, says Morse, 41.
“It’s got to have a business model, it’s got to fit into our strategy,” Morse said. And Yahoo needs to be able to get it for “a relatively good price,” he said.
Morse, who joined Sunnyvale, California-based Yahoo five months after Carol Bartz was named chief executive officer in January 2009, came from chipmaker Altera Corp., where he served as CFO. He spent the prior 15 years at General Electric Co.
Management’s mandate is to reverse the sales growth slowdown that more than halved Yahoo’s stock price since the beginning of 2006. The company is grappling with competition from larger rival Google Inc. and surging growth in social- networking sites such as Facebook Inc. and Twitter Inc.
Morse has helped Bartz cut expenses by about $1 billion and plans to remove an additional $1.5 billion in costs to expand profit margins and add to cash holdings.
“Between Carol and Tim, I think they’re bringing a lot of operational focus,” said Sameet Sinha, an analyst at JMP Securities LLC in San Francisco, who recommends buying the shares, which he doesn’t own. “Yahoo was just run in a very haphazard manner.”
Overspending helped drive down Yahoo’s return on invested capital to about one-quarter the return for Mountain View, California-based Google, Bloomberg data show.
‘Fund That Yourself’
To drive out costs, Morse asks colleagues who want to invest in one area to tell him where they can “de-invest” in another.
“Tell me the other efficiencies that you’re wringing out of the system,” Morse said. “Tell me how you’re going to fund that yourself.”
Yahoo should stick to acquisitions of about $100 million or less that help the company make more money from its 600 million users, said Ryan Jacob, chief executive officer of Jacob Funds Inc. in Los Angeles, which owns Yahoo shares.
“The way to go is small,” Jacob said. “Clearly, there’s a lot less risk employing that kind of strategy.”
In May, Yahoo agreed to buy Associated Content, a Web publishing company that uses individual contributors. The cost of the deal was about $100 million, a person familiar with the matter said then. Two months earlier, it said it bought Citizen Sports, which will add mobile and social-networking features. Last year, Yahoo acquired Maktoob.com, an Arabic-language Internet service based in Jordan.
Data Center Savings
Yahoo may spend $200 million to $300 million on deals this year, with an emphasis on young startups, said Todd Dagres, a general partner at venture capital firm Spark Capital in Boston.
“They’re going to have to make some acquisitions in order to ensure their future,” Dagres said. “To maintain their position it’s going to be a challenge, never mind trying to grow from where they are.”
Morse says trimming costs will help push Yahoo toward operating margins of 15 percent to 20 percent in 2012 from 6 percent last year.
He’s looking to lower expenses associated with Yahoo data centers, which include servers that run the website, by reducing their number and owning, rather than leasing, them. By 2014, power costs will probably drop by 70 percent and total expenses by 35 percent, he said. Modernizing much of Yahoo’s software systems is likely to result in 30 percent savings on maintenance and support resources between now and 2013.
Bringing GE to Yahoo
“If they can meet those cost-savings objectives, then their margin outlook is really quite good,” said Jacob at Jacob Funds. “We probably won’t know until next year.”
Yahoo’s 10-year agreement that will put Microsoft Corp.’s Bing search engine on Yahoo’s sites will be key to the company’s savings efforts. The alliance will transfer search technology costs to Microsoft. Yahoo expects savings of about $300 million this year and $650 million in 2013.
Morse said his years at GE, including as CFO of its plastics division, shaped his management style. The focus on efficiency and long-term planning has helped him add discipline at Yahoo.
“One of the big efforts in the company is to kind of change the culture, create more of a culture of efficiency,” he said.
In the past, managers set short-term goals that were easier to reach, he said. They might plan for a month, rather than a quarter, much less a year or years, Morse said.
He has assigned himself a B or B minus for his efforts so far -- after Bartz, 61, gave herself a B minus in January for her first year. Morse says the job is incomplete.
“It’s a work in process,” he said. “Until you really start ticking off the top-line acceleration, the margin expansion --there’s only so much you can say.”