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Yahoo Needs a Big Acquisition, but Can't Afford It

Being the CEO of Yahoo (YHOO) -- that is, being Carol Bartz -- must suck big time at the moment. A number of reports say that Yahoo's quarterly earnings were flat. But even with a 9 percent increase in operating income and 11 percent increase in net income, revenue was still down by 23 percent year over year.

Make no mistake, it's the revenue that is the biggest problem for Yahoo and Bartz. The company's ad income is shrinking at a time when a competitor like Google (GOOG) sees strong growth. Modest growth in display ads isn't enough to make up for the trend, and the sequential trend for the last two quarters has been negative. The company's only hope at this point is acquiring some business that could fuel some significant revenue growth.

Given the shape Yahoo's in, that doesn't seem too likely.

Excuses, excuses
Bartz has staked her future and reputation on turning things around, an effort that has been effective in cutting costs but that's produced nothing on the revenue side. At least the recent quarter's results aren't a surprise, given Yahoo's guidance last quarter. For years, now, Bartz has requested patience on the part of investors because it takes time to turn a company around. And so it does.

She's more than two years in the position, and there should have been significantly more progress months ago. Trying to position herself as another Steve Jobs doesn't cut it. So far, Bartz and her management team have offered excuses for the lackluster performance, whether turnover in the sales team from a reorganization to the revenue sharing deal with Microsoft (MSFT).

But the organization has long been in turmoil. Why is the sales organization turnaround still in process? At what point do the fixes start working? As far as the Microsoft deal goes, in 2009, when the ink was still wet on the paper and expectations made everything look rosy, Bartz said, "This deal enables us to keep a healthy revenue stream and invest in areas critical to our future."

Just not healthy enough, eh?

Is there a charge card for the necessary shopping?
Bartz has proven that she can't create the type of organic growth Yahoo needs. That leaves acquiring a high-growth company to jolt the finances. And yet, how is Yahoo going to manage that? Groupon turned down Google's (GOOG) $6 billion offer because it thought it could get more through an IPO. LinkedIn (LNKD) has a nearly $10 billion market cap. And forget what Zynga will get.

A hot company that generates real revenue and even profit comes with a high price. But Yahoo's current balance sheet doesn't show the strength to do the deals on a cash basis (click table to enlarge):

Cash on hand has been trending down, suggesting that Yahoo is starting to burn through its cushion. Free cash flow isn't enough to keep up:

A stock deal? Any company that could pull Yahoo out of the doldrums would likely consider that a big risk, given the overall management of the company.

That leaves Yahoo's stakes in Yahoo Japan and But they represent 51 percent of Yahoo's $17.86 billion market cap. Selling them off would take time and signal Yahoo's desperation, meaning that getting a fair price would be hard, as buyers would smell blood in the water. That's to say nothing of the difficulty in selling investors on decimating the value of the company for a speculative venture.

And yet that may be the company's only choice. It would be a real gamble and would require a new CEO, as Bartz has offered no indications that she could pull off the changes necessary. But then, Bartz's days already seem numbered.


Image: Flickr user Brave New Films, CC 2.0.
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