Can Yahoo justify additional layoffs?

Ironfire Capital founder and managing director Eric Jackson weighs in on the issue.

By Benzinga Apr 13, 2012 7:21PM
By Louis Bedigian, Benzinga Staff Writer

Eric Jackson, founder of Ironfire Capital, has been a longtime critic of Yahoo (YHOO). He started the first Internet campaign to increase shareholder value at the company in 2007. Using blogs and other forms of social media, he urged shareholders to vote new leadership onto the company's board.

He gave up on his activist campaign in 2008, selling his fund's stake in the company. But he has still kept a close eye on the company, and spoke with Benzinga about recent events there. He said he was particularly baffled by the fact that Yahoo still employs 1,800 in its search division.

"I don't know what these people do," said Jackson. "The whole justification of the search deal with Microsoft (MSFT) was to pass that responsibility over to them. Supposedly all Yahoo does is sell some premium ads and, you know, user interface, which is just a fancy way of saying putting a box somewhere on a screen. They could get rid of those people right there." (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Jackson, whose company specializes in long and short investments and corporate governance, told Benzinga that many former Yahoo employees believe there is "enormous fat there to cut." In fact, he added, they think it might even be possible to cut the workforce down by half. "But that's a huge, dramatic endeavor to cut that many people," he added. "It has effects on morale and so forth. It could well be possible over time. But in the first year, I think it's more realistic to do a cut of 5,000." 

It could be possible to cut another 3,000 positions just in the media and ad-technology platform divisons at the company, he continued.

When asked if too many cuts could actually turn off some investors, Jackson said that he thinks most investors want to see cost rationalization. Before the recent layoffs, the workforce plus the additional contractors hired numbered close to 20,000. Compare that with AOL (AOL) or IACI (IACI), two companies that employ 3,000 to 4,000 (removing the employees at AOL's troubled Patch division).

At Yahoo, he added, "it'll be hard to go from 20,000 to 3,000, but it's just too big. And that's come over a bunch of years and a bunch of CEOs that have been too worried about making the tough decisions and hurting people's feelings by making these cuts."

But Jackson pointed out that while Yahoo's core business has been shrinking, the company is still profitable, bringing in about $1.5 billion in earnings over the last year before taxes and other deductions are taken out. Cutting 5,000 from the workforce could bring $700 million to $900 million in annual savings, which would boost the bottom line.

"Most investors know the business is going to trade on a multiple of EBITDA, so any chance that you can get to up that EBITDA should be reflected in a big jump in the price of the stock," he said. "Absolutely they're gonna be supportive of it."

Trimming the workforce is a tough call to make, he said, but it's on the target list of levers that can be pulled to increase value at the company, he said.

"It's kind of a sensitive topic to talk about publicly because obviously it's dealing with people's lives," he said. "You don't want to negatively affect morale, so you don't necessarily want to talk about it openly."

Carol Bartz attempted to reduce headcount during her tumultuous time as Yahoo's CEO, said Jackson. But even in those years, new hires replaced many of the departing employees, so the actual total headcount continued to grow.

Promising ventures

With regard to Yahoo!'s other developments, Jackson credits the firm's deal with ABC News as being the biggest hit of 2011. "I think that people have taken notice of that," said Jackson. Original content -- particularly original videos such as comedy specials and shows -- has seen a lot of traffic at the site. "Video definitely holds a lot of promise for Yahoo and is probably going to be expanded now," he said.

While the ABC News deal may have proven to be a smart investment, Jackson believes that Yahoo's new CEO, Scott Thompson, will take a hatchet to wasteful spending. Yahoo! Music, for example, was once a hugely popular website. But now that the site is dead, Jackson said it could be closed any day now.

Patent wars

Jackson said that it's difficult to accurately assess the patent dispute between Yahoo and Facebook.

"There are a lot of opinionated ideas on this, but it's difficult to know exactly what's going on and what kind of a deal might get struck," said Jackson. "There could definitely be a settlement between the two; frankly, that would be good for both sides."

If AOL (AOL) could get $1 billion from Microsoft for its patents, Yahoo! could potentially get more, Jackson said. "If Yahoo could get something like $2 billion or more for its portfolio, it would be a huge win for shareholders," said Jackson.

Finally, I asked Jackson about the potential for Yahoo to hold on to its patents and make money over time.

"AOL is really charting new waters here," said Jackson. "That was a huge, unexpected deal."

AOL struck a deal with Microsoft that allows AOL to basically use those patents themselves on any third-party that might come after them in the future, Jackson said. "It was a really smart deal that kind of got the value for those patents but didn't leave them in a vulnerable state," he added. "It might very well lead to a new trend where other companies, like Yahoo! and maybe somebody else like RIM (RIMM), tries to do that."

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