Should this CEO be worried?

Photographer: Jason Alden/Bloomberg

Yahoo's Troubled. Don't Blame Marissa Mayer.

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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There have been a lot of musings of late about whether or not Marissa Mayer is the right chief executive for Yahoo. This is, after all, a company that once went through six chief executives in only seven years. Each of them tried to make Yahoo sing, and their efforts were all thwarted.

The New York Times recently published a long, unflattering story  (an excerpt from Nicholas Carlson's book) about Mayer that essentially portrayed her as incompetent and her turnaround efforts as dubious. A series of counter narratives then defended her two years as chief Yahoo. Notably, angel investor Jason Calacanis penned a point-by-point rebuttal of the Times story, concluding that Mayer needs more time, money and leeway around acquisitions to get the job done right.

A New York magazine piece invoked the specter of the glass cliff and contended that Mayer, like many women before her, was put in an impossible situation and set up to fail. I looked at Mayer's challenges in a column last fall, and others had questions of their own long before me.

What’s most interesting about the Mayer critiques and defenses, including mine, is that they’re largely sideshows. Pick Mayer apart or build her up. Either way, the Yahoo tanker would be hard for anyone to turn around.

Yahoo’s main business, selling digital display ads on the web and ads related to Internet searches, is floundering. Prices for those ads are going down and marketers have decided that they want mobile, not desktop, exposure. Yahoo, in short, is dealing with a structural decline. No one’s gonna put a stop to it.

None of Yahoo’s nascent moves in mobile, native advertising, social media or video are growing fast enough to offset its shrinking core business. Together these new businesses comprise about a fifth of the company’s revenue - so 20 percent of the business is growing while 80 percent is shrinking. Little wonder so few people are clamoring for the CEO job at Yahoo.

Mayer or no Mayer, investors would still fret about the future of the company and its stock price. This year Yahoo will divest its treasured stake in Alibaba, the asset that fueled Yahoo's remarkable stock surge during the Mayer years. When Mayer became CEO in July 2012, the stock was trading at $15. Now it is at $49, thanks largely to Alibaba’s performance. Once that asset is gone, Yahoo's core problems will infect its stock price.

So how will Mayer, her team and her board deal with the very few strategic options available to them this year?

Big acquisitions are unlikely to happen until the company finds a tax-efficient way to divest its stake in Alibaba, a move that Mayer and chief financial officer Ken Goldman have strongly hinted will happen when the stock can be sold in September. (There are only a few ways to sell it that will help Yahoo avoid a huge tax bill.)

My Bloomberg View colleague Matt Levine and Bloomberg News’ Jeffrey McCracken have both written about the benefits of Alibaba simply buying Yahoo. It’s a relatively simple process and Alibaba would acquire about $40 billion of its own stock in the deal. Jack Ma has explicitly said that he’s interested in buying Yahoo since the companies’ assets are entwined and important to one another.

“All the serious buyers, they already talked to us, and they should talk to us more,” he told the audience at a Stanford Graduate School of Business talk.

This is the best solution for the company. If Mayer gets to remain CEO of Yahoo after Alibaba acquires it, then it’s the best solution for her too. She’d run Yahoo under the auspices of a parent company that appears to be in her corner.

Mayer was able to convince Alibaba and Ma to allow Yahoo to sell a much smaller portion of its Alibaba stake as part of the Alibaba IPO than previously required – 140 million shares instead of 262 million. That deal required some relationship building on Mayer's part, and ultimately secured Yahoo an extra few billion dollars of value.

With Alibaba as a parent and partner, any big, transformative acquisition Mayer might make would also have a better chance of being nurtured and succeeding. Takeovers only tend to work when the buyers are big, healthy companies, like Google was when it bought YouTube or Facebook was when it bought Instagram.

A powerhouse acquirer ushers a target company into a thriving, expanding platform and both parties can be transformed for the better. When a struggling company makes an acquisition - and yes, I'm thinking of Yahoo's purchase of Tumblr right now - it’s harder for the target to succeed.

If Alibaba acquired Yahoo, Mayer would also get some help and coaching from Jack Ma, whether or not she wants it. Ma has made it clear that he believes Alibaba is one of the “few companies that really understands Yahoo USA very well.” During his Stanford talk he also hinted that he has strong ideas of his own about how to turn the company around, including layoffs.

If Mayer doesn’t do this deal, the other available option is a so-called "cash-rich spin," meaning that Yahoo would pair its Alibaba stake with an existing operating company and spin it off. As Bloomberg’s Leslie Picker and Jesse Drucker have pointed out, Mayer would be left with a company valued at about $12 billion when the Alibaba assets were taken out.

Given how small Yahoo would become after a cash-rich spin, it would also immediately throw the company into play for private equity firms. That would make it easier for new owners to rehab Yahoo outside of the public market's glare, much like Dell did when it was clear that its business had completely derailed.

Yahoo's situation is, of course, very different from Dell. There’s no controlling shareholder and founder, and a privatization in any form would be complicated. Moreover, with no stock to use as currency, the idea of a big acquisition would then be off the table.

The likely outcome then would be that the PE honchos break up the company and sell it for parts. Yahoo still engenders enough fond feeling in Silicon Valley and beyond that no one really wants that, least of all Mayer, whose legacy would then be that of the CEO who oversaw the company’s trip to the chop shop.

There may not be a "best CEO" for a company like Yahoo, and Mayer’s made her share of mistakes. But she now has a chance to give Yahoo a new life under a thriving parent company that wants Yahoo to survive and grow more than, say, the activist investors who are beating at the door. Yahoo's troubled, and because of that Mayer's tenure has been troubled. Mayer needs to take Yahoo out of play and buy herself some real time to make it better.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Timothy L. O'Brien at tobrien46@bloomberg.net