Richard Windsor
15 March 2017

Yahoo - Earned assets

This time Marissa has really earned her payoff

Following the sale of the Yahoo core business to Verizon, Marissa Mayer will step down as CEO of Yahoo and will receive a severance package worth $23m. This has once again raised the issue of excessive payoffs to failed senior executives, but for the first time since she became CEO, she has earned every penny of her severance. Yahoo has completely failed to build a digital ecosystem but it has successfully sold an asset that can easily be argued to be worth nothing for $4.48bn. While the core business is cash generative, it is in decline and has also suffered two of the worst security breaches in Internet history. These breaches could easily trigger a mass exodus of users.

Over the last 12 months, Yahoo has admitted that around 1.5bn user accounts have been compromised in two very large break ins. This is more accounts than Yahoo actually has, implying that every account that Yahoo has been compromised with a good number of its users having suffered the indignity twice. If this was not enough, Yahoo’s Q4 16 results showed improving margins solely due to cost cuts which deflected attention away from the fact that revenues are still falling, albeit more slowly than before. For the last 10 years, Yahoo has neglected its Internet assets but it has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile. It is this engagement that Verizon is paying $4.48bn for.

However, recent events have given users the perfect excuse to finally close their Yahoo email account and move to something else. Following the disclosures of these hacks, Verizon attempted to have the price cut by $925m but Yahoo managed to beat it down to a much smaller $350m discount. Furthermore, Yahoo will only shoulder half of the liability for any class action lawsuits that result.

If we were Verizon, we would have been looking for Yahoo to shoulder all of the liability as it was due to Yahoo’s inattention and neglect that allowed the breaches to occur in the first place.

Despite is very poor business performance, Yahoo’s management has done a superb job in capitalising on Verizon’s apparent desperation to build a digital ecosystem and on its belief that it needs Yahoo’s assets to do that. We have long thought there was a very real chance that Verizon would walk away from this transaction leaving Yahoo with a fast depreciating asset and a potentially large liability. Consequently, Marissa Mayer has probably enriched shareholders by more than $1.5bn making her $23m payoff look very reasonable indeed.
With Yahoo’s shares now at $46, there is still some upside left but much less than the last that we valued the shares at $50.4.

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