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Last October, Sanford Bernstein analyst Jeff Lindsay authored a sum-of-the-parts analysis of Yahoo (NSDQ: YHOO) that proved to be fairly controversial. The report was interpreted as a call to break up the company, when in fact it was just pointing out that the company was sitting on valuable assets that could be unlocked if management made the right moves. The report, along with all of the buzz about the Alibaba.com IPO, contributed to a healthy run in Yahoo shares in the Fall, but since then the company has given most of it back — even after yesterday’s Microsoft (NSDQ: MSFT) rumors. Now Lindsay is back with a grim message: management isn’t taking the proper measures to turn things around, causing operations to deteriorate. The market, he points out, is now putting a lower price tag on the core business than the company’s holdings.
— Operations: Lindsay points to a number of problems for the company’s core business. Search market share declined from the beginning of 07 to the end of November, from 22.1 percent to 17.2 percent, while growth in both page views (a fairly anemic 4 percent year-over-year in December) and revenue remains unimpressive. Other headwinds include the decline of its DSL business and the vulnerability of display advertising during a time of economic weakness.
— Holdings: Based on the most recent information about Yahoo’s holdings (Alibaba, Alibaba.com, Yahoo Japan, Cash, etc.), Lindsay estimates their value at around 17.6 billion, or approximately 55 percent of the company’s market cap. This works out to $13.24 per Yahoo share, leaving the worth of Yahoo’s core business somewhere around $10.25 per share. Lindsay notes that the value of some of Yahoo’s holdings, particularly Alibaba.com, has drifted downward since the initial excitement.
— The prescription: Lindsay’s core concern is that the company is more interested in making incremental product improvements, as opposed to radical strategic shifts. He cites the recent initiatives that the company unveiled at CES — which Lindsay actually likes — as examples of the company’s un-radical strategy. What he wants to see are layoffs, the outsourcing of paid search (which was suggested before) and a much bigger focus on Right Media.
— Microsoft: “We think the reports in the Post are baseless as they were the previous two times, and in the unlikely event that Microsoft is contemplating acquiring Yahoo, we think the acquisition would be value-destructive and a particularly bad idea for both players.”