Yahoo! is for sale: why banks should care
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20 February 2016
The rollercoaster that is Yahoo! continues. Yesterday, the company officially announced that it was putting itself on the selling block, in a move aimed at holding off an aggressive activist hedge fund called Starboard Value. It was only in December when management shared the stunning news that Yahoo! was planning to spin itself off (more precisely its core Internet businesses) to its shareholders. The announcement in December came on the heels of a nearly 12-month project aimed at spinning its 15% interest (worth $30 billion) in Alibaba, the Chinese e-commerce company, to its shareholders, a transaction that has been abandoned over tax concerns. By spinning out the Alibaba stake to Yahoo!'s shareholders, Marissa Mayer and the Yahoo! board hoped that shareholders could benefit from the Alibaba investment while Yahoo!'s management could focus on rebuilding the company's core Internet businesses. Rebuilding is the correct word here. Founded in 1994 and going public in 1996, Yahoo! once lived a charmed life as the so-called "originator" of the search engine. In fact, Yahoo!'s original business represented a searchable directory of websites curated by Yahoo! staff. It was Google that improved on Yahoo!'s original idea by deploying technology that could automate the building of a website directory by using bots to crawl the web, catalog the content of websites, maintain an searchable index of the result, and most notably calculate the importance of a website that reflected the number of inbound links from other websites. Ironically, Yahoo! responded to Google's innovation quite awkwardly, first partnering with Google, then walking away from the partnership in 2004 as it sought to exploit the technology of acquired businesses such as Inktomi (2002) and AltaVista (2003). After a dalliance with Microsoft's Bing in 2010, Yahoo! finally came back to Google earlier this year, signing a three-year partnership in October. What can banks learn from Yahoo!'s adventures? It's very simple: innovation is a game that is played for a full 9 innings. Yahoo! was a public company for two years before Google was even founded, and the company at one point enjoyed a market capitalization of more than $100 billion. Today, Google's market cap is more than $480 billion while the market cap of Yahoo! is less than $30 billion, which is slightly more than the current value of its holdings in Alibaba. So with full benefit of hindsight, Yahoo!'s original idea to offer a curated list of interesting websites was itself innovative, but it was Google's use of automation in capturing and cataloging the rapidly growing content of the web that fueled the revolution that drives much of the global economy today. As the legendary British venture capitalist Sir Ronald Cohen once argued in his book The Second Bounce of the Ball:
"We can all see where the ball in bouncing today, but few of us try to anticipate where tomorrow's bounce will be, and even fewer will attempt to take advantage of it. "The forward-thinking banks that heed the lesson of Yahoo!'s current troubles will stop worrying about the pressure coming from the current crop of Fintech upstarts and will focus on that second bounce of the ball, the place where the real opportunity lies. There is still plenty of time left in this game.