Yahoo Saga Continues: Thompson Steps Aside

One month after  Yahoo  CEO Scott Thompson announced a reorganization of the company, he announced his resignation after discrepancies were found in his resume related to his education. Ross Levinsohn will take over as interim CEO. The board of directors is being reshuffled, as Fred Amoroso, Dan Loeb, Michael Wolf, and Harry Wilson are replacing Roy Bostock, Patti Hart, VJ Joshi, Arthur Kern, and Gary Wilson.

Loeb, the head of activist hedge fund Third Point, has been the primary catalyst for these changes, although it remains to be seen if this result is a pyrrhic victory.

Although we believe its shares are modestly undervalued, Yahoo has made no headway in addressing its core challenges. We continue to expect weakness in Internet search revenue, which will constrain the company's growth and ability to expand operating margins. The solution for realizing value from its ownership positions in Yahoo Japan and Alibaba Group is unclear, given the failed efforts thus far to come to an agreement. Additionally, while we recognize that entertainment and finance are key assets for Yahoo, overall traffic growth has been mostly stagnant to declining for most of the firm's properties. We are also concerned about the company's position in mobile and social networking, two trends that are threatening Yahoo's core business.

The challenge of managing a business with declining assets presents an interesting conflict for the board of directors and management. We expect Loeb to use his influence to pressure for liquidation of Yahoo Japan and Alibaba Group, which could provide some near-term upside for the shares. Still, we remain concerned that Yahoo may choose to allocate capital to areas that offer no competitive advantages but merely provide a near-term revenue boost. In our view, the risks around doing a large acquisition are meaningful, so we remain cautious about recommending Yahoo as a long-term investment.

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