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M&A bids, strategic alternatives have Yahoo looking forward


According to Market Intelligence, December 2022


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M&A bids, strategic alternatives have Yahoo looking forward

Buffeted by headwinds, Yahoo! Inc. is looking for relief, and suitors arecircling.

The companies reportedly include , , , , and Each of these is reported tobe interested in astake in the legacysearch giant, and as the suitors line up, Yahoo has the deadline for preliminarybids.

The company's assets include its core search and mediabusinesses as well as its 35.5% stake in Yahoo Japan. The company's $35 billionmarket cap has benefited in recent weeks from M&A speculation and internaldetails revealed during the bidding process. The company's of 6,000 patents alone couldbe worth as much as $4 billion. The company also appears to be working on amobile search assistant called Index, enabling it to better competewith similar efforts from AppleInc., Microsoft and Alphabet.

Yahoo shares began gaining steam after CEO Marissa Mayerannounced the company's strategic plan in early March. Since March 1, Yahoo hastraded up about 11.8%, well outstripping the SNL Kagan New Media index, whichgained just 4.8% in the same time. The turnaround signals one of the fewrebounds Yahoo has managed in the past year. Since July 2012, when Mayer tookthe helm with promises of a turnaround for the business, Yahoo has traded upover 130%, with most of the gains clocking in the first two years of that timeperiod. But near the end of 2014, shares took a turn for the negative, and itseems only drastic measures, like M&A alternatives, have been able to movesentiment.

The company's market cap gains since Mayer took officeillustrate some general bullishness for the company. Yahoo shares beat the SNLKagan New Media index for that period. But compared to the direct competition,it seems Yahoo is still out of favor among online advertising investors.

Alphabet shares gained over 160% during that period, andFacebook Inc. sharessoared over 255%.

Yahoo has struggled to keep advertising revenues afloat.Additionally, the central piece of Mayer's turnaround story — the Mavensbusiness, which includes mobile, video, native and social products — alsoseemed to flat-line at the end of 2014.

Considering advertising revenues for Yahoo, Alphabet'sGoogle Inc., Facebookand AOL — which includes the largest online advertisers to date — Yahoo onceoperated near the top of the group. In 2003, each of Yahoo, AOL and Google heldbetween 30% and 40% of the market share total among those companies. In otherwords, advertising revenue was almost split evenly between the three.

At the time, AOL's business was in a free fall. Just twoyears prior, AOL generated almost 80% of revenues for the group, Yahoo about20% and Google near 1%. As AOL's business plummeted, Yahoo and Google split thedifference in a very competitive battle of search engines. Each collected over40% of the group's revenue going into 2005, but the market share in the searchbusiness was rapidly changing.

By the end of 2005, Google took almost 60% of search querieswhere Yahoo took just less than 20%, according to OpenKnowledge. By 2008, the share of search traffic would solidify and stayrelatively flat for Google over the next seven years. In October 2015 and October2008, Google sites garnered about 63% of searches, according to SearchEngine Land. However, Yahoo would continue to lose share, dropping from20.5% of queries in 2008 to 12.5% in 2015. AOL's search business neverrecovered.

The revenue picture generally matches the trend in searchqueries for Yahoo, even as Google's revenue has skyrocketed on a diversity ofonline advertising and other businesses. Yahoo's advertising revenue peaked in2007 at just over $6 billion. Meanwhile, Google had surpassed the $6 billionmark in 2005 and had grown to $16.41 billion by 2007. The introduction ofFacebook's social advertising as a competitive force in 2009 left Yahoostruggling to show growth. Facebook's advertising revenue soared from 764.0million in 2009 to $17.93 billion in 2015.

During the fourth-quarter and full-year 2015 webcast, Mayerreflected on the state of the company when she took the executive position in2012. "We were sitting on $5 billion in deteriorating revenue with noclear path to growth. … We needed to turn that revenue around with newbusinesses, not existing ones."

Yahoo did manage a turnaround in 2015, as it beat top-lineguidance in the fourth quarter. Starting in 2008, the company showed only twogrowth years for online advertising before 2015, and those two years barelyregistered in the positive numbers. Meanwhile, in years like 2011, the companysaw advertising revenues shrink as much as 24.5%. Then in 2015, the companygenerated 13.6% ad revenue growth. Mayer said that about a third of thecompany's total 2015 revenue was completely new revenue.

However, investors are beginning to wonder if all that newrevenue is stagnating as well. The company's Mavens strategy, focusing on areasof secular growth in online advertising like mobile and video, seemed to beshowing some strain in 2015. Mavens revenue climbed 57.8% from $230 million inthe first quarter of 2014 to $363 million a year later. By the end of 2015,Mavens revenue hit $472 million, but growth had compressed to 25.9%.

While Mavens represents a diversity of businesses, and it isstill posting double-digit growth, a central piece of the strategy relies onmobile usage. Mayer has indicated that engaging users on mobile devices is keyto other Mavens initiatives. On that front, it seems Yahoo is again strugglingto show growth.

For each quarter in 2015, Yahoo only revealed that mobileusers were above 600 million without providing more specifics. In the fourthquarter of 2015, mobile revenue had grown 15%, the executives said, which isgood for a company that has been struggling to expand but still modest for anambitious turnaround initiative.