On Monday, hedge fund manager and Real Money contributor Eric Jackson unloaded on Yahoo!'s (YHOO) board of directors, CEO and the private-equity buyers who are circling the company like a pack of hungry jackals. Jackson argues the company can be turned around and the stock would go much higher if the company made major changes.
Jackson, managing director of SpringOwl Asset Management, released a brutal 99-page slide presentation slamming the current management team and the board. Jackson argues that the company can be turned around and that the private-equity dealmakers who are urging the board to sell the company's core business are trying to buy the business on the cheap. (Jackson elaborated on the presentation in a Real Money column you can read here.)
Yahoo!'s core business is in desperate need of a turnaround. Jackson argues Yahoo's five-year EBITDA (earnings before interest, taxes, depreciation and amortization) trend has declined 55%, while companies like Alphabet (GOOG, GOOGL) and Facebook (FB) have seen their EBITDAs soar by 97% and 444%, respectively. Over that time, Yahoo!'s revenue is down 21%, while Facebook's is up 640% and Twitter's (TWTR) revenue is up 690%. And during the past four years, Yahoo's stock-based compensation expense has soared 88%.
Jackson claims the company has misallocated $10 billion, which was spent on unwise acquisitions and failed products. He also complains about other unnecessary spending, including free food for employees that is estimated to cost $450 million over the past four years, sponsoring the Met Ball gala at a cost of $3 million, and throwing lavish parties, including a Great Gatsby-themed holiday party that was estimated to cost nearly $7 million. I guess when EBITDA has declined 55%, you don't deserve a free lunch.
SpringOwl believes the company could save as much as $2 billion by cutting 75% of its workforce, selling its headquarters and finding a merger partner, like Liberty Media (LMCA). Liberty has a strong operational record, and it could make the most of Yahoo!'s valuable media assets.
By avoiding a proposal by activist Starboard Value to "sell the core business at the low," Jackson believes Yahoo! could trade as high as $100 per share.
Jackson is on the right track. For years, Yahoo! has been in constant turmoil. Since Terry Semel quit the CEO position in 2007, Yahoo! has had four CEOs, endured attacks from activist investor Carl Icahn, a proxy fight with Dan Loeb of Third Point Management, and suffered through two fired CEOs. Current CEO Marissa Mayer has been paid $365 million over the last five years, while she dumps her stock options and 15% of Yahoo!'s top talent fled the company.
Through all this turmoil, users (and advertisers) have moved from the desktop to mobile, but Yahoo hasn't made the shift. Jackson points out that in the third quarter of 2015, Facebook's mobile revenue grew 12.5x that of Yahoo!.
The missed opportunities have taken a toll on the company. In 2010, Yahoo! had revenue of $6.3 billion. The consensus forecast for next year is $4.8 billion, almost exactly the forecast for 2015.
I agree with Jackson's recommendations, but I don't think the board will fire Marissa Mayer or drastically alter the company's course. That's why I don't think you can own Yahoo! shares, despite all the promise of a higher stock price. I've seen a lot of sum-of-the-parts valuations or break-up scenarios that supposedly drive the stock up, but why dream about them? Until the board shows some gumption in fixing the management team, there are better investments out there.