Myopic Investors Want Yahoo To Merge With AOL

A Reuters article reports that frustrated Yahoo investors have appealed to AOL CEO Tim Armstrong to “explore a merger [with Yahoo] and run the combined company.” On paper this may make some sense because the companies would cut jobs and save money accordingly; however it makes little sense for the long term health or performance of Yahoo.

Here are the relevant bits from the Reuters piece:

At least two top-10 Yahoo shareholders are so unhappy with Chief Executive Marissa Mayer’s turnaround efforts that they are making a direct plea to AOL  CEO Tim Armstrong to explore a merger and run the combined company.

Their move follows an activist campaign by hedge fund Starboard Value LP, which is pushing Yahoo to consider a deal with AOL and unlock Yahoo’s valuable stakes in Asian Web companies . . .

These shareholders were left with the impression that a combined company could yield as much as $1.5 billion in cost savings.

These “investors” are chiefly interested in maximizing their short-term gains but are giving little thought to the well-being and long-term health of either Yahoo or AOL or their employees. The investors would be long gone by the time the full impact of such a merger played out.

I acknowledge there could be some scale benefits for display/programmatic advertising in the combined company. However the costs, inefficiency and disruption of merging the two large entities, and corresponding loss of employee productivity, would essentially destroy any momentum that Yahoo and AOL have today.

Beyond this, simply eliminating jobs (aka “cost savings”) isn’t a strategy. Maximizing the welfare of company employees should be a corporate value that investors also respect — but they generally don’t.

There’s almost no thought given to employees in these calculations, except as a “cost center.” However employees do the work and their morale, productivity and retention are critical. Investors seem to have little understanding or appreciation of the role that the “rank and file” play in corporate success.

A similar cost-savings/consolidation rationale was used to justify the Bing-Yahoo search outsourcing deal. Investors aggressively pushed that deal with the argument that Yahoo wouldn’t need to invest in search technology any longer and the combined “Search Alliance” would be a countervailing force to Google’s market dominance.

Almost every single assumption and theory about that deal turned out to be completely wrong. Investors couldn’t have been more incorrect about the impact of the search merger:

• The Search Alliance never gained share from Google — not one point
• Bing gained share from Yahoo and decimated its position in search
• Yahoo lost key employees, technology expertise and recruiting credibility that took years to repair (Mayer has now done that)
• Beyond cutting headcount it’s unclear what if any real “cost savings” there were
• Yahoo is stuck with the a bad deal for roughly five more years, which limits the company’s ability to innovate in search (although it doesn’t impact mobile)

Many of the institutional investors who likely made out in the short term might still argue that the search merger was a good idea but most thoughtful observers would see the deal as a bad one for Yahoo, its reputation with employees and advertisers and its position in the market. Indeed the net impact on Yahoo’s revenues and financial position has been almost entirely negative.

Going out on a limb I think there’s probably also a healthy dose of sexism playing in the background of this AOL outreach. These unnamed Yahoo investors are likely men, frustrated that they can’t control Mayer. She’s not “one of them” in the way that Armstrong may appear to be.

I’m not trying to argue that Mayer is doing everything right or that she hasn’t made mistakes. She came into a near-impossible situation and probably overspent on acquisitions. However I would argue she’s done a good job getting Yahoo back in the game. But for these myopic short-timers it’s not enough.