Yahoo's 2,000 cuts are just a start

The struggling Internet company still looks bloated, and rival AOL could use a trim, too.

By InvestorPlace Apr 4, 2012 2:17PM

By Jonathan Berr

Yahoo (YHOO) CEO Scott Thompson's plan to slash about 2,000 employees -- or 14% of the Internet media company's work force -- doesn't go far enough. But it will ratchet up the pressure on AOL (AOL) CEO Tim Armstrong, whose company is also struggling, to do the same.

Thompson, who joined Yahoo in January after heading eBay's (EBAY) PayPal unit, needs to fundamentally restructure Yahoo, which in its current configuration makes no sense. Nothing should be off the table, including selling Web properties and patents. The company also needs to finally unload its 35% stake in Yahoo Japan and its 40% interest in Alibaba.

Shares of Yahoo have fallen nearly 52% since 2007. In 2008, Yahoo rejected Microsoft's (MSFT) unsolicited $44.6 billion offer, arguing at the time that it was too low. It was one of the worst decisions in the history of corporate America. The market now values Yahoo at about $18.3 billion. And recently, about everything that could go wrong has done so, including a potentially costly patent litigation battle with Facebook and a proxy battle with activist investor Third Point. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Kara Swisher of All Things D described the cuts as "the tip of the proverbial iceberg that will hit the storied Silicon Valley Internet giant in the months to come." She added that Yahoo is "doubling down" in some areas and that there will be "simultaneous hiring" in the months ahead.

How this will net out is not clear. Unfortunately, Yahoo looks bloated even with the $375 million in expected savings from the cuts.

Yahoo earns $353,489 per employee, dramatically below the industry average of $11.54 million. Net income per employee is $41,542, which lags badly the industry average of $2.16 million. Based on that data, it doesn’t take a psychic to figure out that more layoffs are on the horizon.

Like Yahoo, AOL is a vestige of the early days of the Internet when websites tried to be all things to all people by offering a wide variety of services, from celebrity news to fantasy sports to stock quotes. As the Internet has evolved, this approach no longer works -- a message that Wall Street learned long ago.

AOL's Armstrong, who recently signed a four-year contract guaranteeing him $1 million in salary plus bonuses, is under exactly the same pressures as his counterpart at Yahoo to create shareholder value. Like Yahoo, AOL is facing a nasty proxy fight. Starboard Value LP wants Armstrong to unload assets such as MapQuest and Moviefone. The investor, which recently grumbled about AOL's decision to delay its annual meeting, is particularly irate about Patch, AOL's network of more than 800 hyper-local sites, which Starboard argues could lose $150 million this year. Even the once-ubiquitous AIM instant messaging service is withering.

Shares of AOL have soared more than 21% year to date on expectations that Armstrong will take the company private. To be fair, AOL did post better-than-expected fourth-quarter results, but expectations were ridiculously low. To fend off Starboard, Armstrong will have to do better than brag about having the smallest revenue increase in five years.

Even with its recent job cuts, AOL also appears to be bloated, generating revenue per employee of $389,064 and net income per worker of just $2,314. Like Yahoo, the question isn't whether massive layoffs are coming but when.

Jonathan Berr is a former AOL contract writer. He doesn't own shares of the companies listed here.

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Apr 4, 2012 4:39PM
BREAKING NEWS.....Obama blames Bush for Yahoo layoffs.....LOL
Apr 4, 2012 3:58PM
Yet they say the recession is nearly over, really I don't think so.
Apr 4, 2012 5:17PM

If a company has employees that can make the company 3-4 times what they get paid, the company should be pleased.

But, I guess in these times if you can't make at least 10 times what you earn you'll be considered a unproductive employee and terminated :(

yahoo has always had money issue's.   wasn't google or microsoft trying to buy it several years ago.

in anycase, the company practices censorship and squashes freedom of speech.   so too bad for yahoo but obviously it is a cursed company.
Apr 4, 2012 5:59PM
Good, I hope they lay off the people who keep pulling my posts because they are not PC...
Apr 4, 2012 6:04PM
I read this article about Yahoo layoff 2,000 employees and this will be happening for people to not use the Yahoo email or other Yahoo sites anymore. And will MSN be the next one?
Apr 4, 2012 4:08PM
This is about competition, not recession.  Google and Facebook excrement on Yahoo.  But it's Silicon Valley, they will be re-employed by midnight.
Apr 5, 2012 11:36AM
Yahoo needs to "retool".  Their browser and chat site SUCK.
Apr 4, 2012 4:44PM
Like everything on the web, this too will bounce back.  Where's your enthusiasm guys?  Hang in there, you're down but not out. 
Go back to the drawing board and bring in the troops for a new realignment.  Don't just sit there, do something.  And make it great! 

Apr 4, 2012 5:51PM
Forget Obama, Romney,,,, Forrest Gump for PRESIDENT in 2012
Apr 4, 2012 4:16PM

Please join Mr. Rodgers and all say ".......wouldn't you like a bailout too!" Godbless, are kidding me? Where is the good times? Big banks, automakers, they are just rolling in the green stuff....that alone spells good times for all. The golden rule is alive and well....them with the gold, makes the rules.


By the way, whats the difference between a catholic priest and bankers? Bankers will pork any ****!!

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