Commentary: Don't Believe the Yahoo! Hoopla

By Ben Elgin

When new Yahoo! Inc. (YHOO ) Chief Executive Terry S. Semel swooped in on Dec. 12 with an unsolicited offer to buy Ltd. (HOTJ ) for $436 million, analysts cooed, calling the move "bold," and portraying the company as a "sleeping giant awakening." After keeping a low profile in his first six months on the job, Semel is now revealing his strategy: Yahoo will move beyond its model as an ad-dependent assembler of Internet content and begin to own and develop its own properties and services.

And its recent flurry of announcements, including the hostile bid for HotJobs and the acquisition of music site LAUNCH Media Inc. in June, has investors hopping. Yahoo's stock is up 127% in the past three months, to $18.38. Like many tech shares, "there's a recovery expectation built into the stock right now," says Thomas Weisel Partners LLC analyst Gordon Hodge.

Still, amid all the recent Yahoo hoopla, giddy investors seem to be ignoring one key point: Yahoo's turnaround is far away. Any recovery hinges on Semel's efforts to diversify its business and cut costs further. Yet even in the rosiest scenarios, his moves are a long way from paying off. Assuming Yahoo wins HotJobs, the career site would be hard-pressed to deliver profits. In the first nine months of 2001, it lost $21.3 million on revenues of $92.5 million.

Nor are Yahoo's financials any better. Revenues, 80% of which still come from online ads, are expected to shrink 39% in 2001, to $700 million. And after posting profits in 2000, the company has suffered operating losses of $87.5 million through the first three quarters of 2001 and is expected to post another $35.8 million loss in the fourth quarter, according to John Corcoran, an analyst at CIBC world markets.

So how does combining two money-losing companies create a winner? Yahoo argues that the synergies between the companies would make the HotJobs deal profitable within 6 to 12 months. Still, it's unclear how exactly that will happen. Deal proponents claim that access to Yahoo's 210 million monthly visitors could help HotJobs increase its exposure and reduce its advertising budget. Combining Yahoo's own job site with HotJobs would boast 8 million resumes. But that pales beside market leader's 14 million resumes and $50.7 million in operating profits in its latest quarter.

Nor is Yahoo's $12 million purchase of the No. 10 music site, LAUNCH Media, in June, any more promising. Yahoo gets more content, including a large collection of music videos. But LAUNCH was a teetering also-ran before Yahoo bought it, and so far Semel hasn't turned it around. In its last stand-alone quarter, LAUNCH posted $14.2 million in net losses on revenues of $3.8 million. To make his mark in online music, Semel needs to build its subscription service through his partnership with Universal Music Group and Sony Music Entertainment Inc. But whether or not that can deliver profits is anybody's guess.

Clearly, Semel has been dealt a challenging hand. Even with the current rally, Yahoo's market valuation has shrunk 92%, to $10.5 billion, over the past two years, making surefire acquisition targets too pricey. But in areas such as cost control, where Semel exerts greater control, he could do more. In November, Yahoo announced it would cut 300 jobs. But that's merely a scratch for a company that boasts 65% more employees and 48% higher operating costs than the last time quarterly sales were at around $160 million, back in September, 1999.

With no upturn in Net advertising in sight, Semel faces a tough future. Getting his new deals to pan out while pulling the plug on money-losing units is about his only option. Until he does, Yahoo's recent Wall Street run really is too good to be true.

Elgin covers technology from San Mateo, Calif.

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