10.24.11

The Paris Hilton of Tech

No one can figure out why, but despite Yahoo’s rocky history, many still want to hook up with it—Google’s just the latest rumored suitor. Dan Lyons on whether a deal is likely.

Yahoo has turned into the Paris Hilton of tech companies—a ditzy, dopey outfit that remains enormously popular even though nobody, including Yahoo itself, seems to know exactly what Yahoo does for a living. And like the heiress, for reasons that most sane people can’t understand Yahoo continues to attract a string of potential suitors and to find itself the subject of constant rumors even though it long ago ceased to be interesting.

The latest rumor: Google is going to buy Yahoo. Or, rather, Google will put up some of the money that certain unnamed buyout firms will use to buy Yahoo, according to a Wall Street Journal report citing unnamed sources. Teamwork is needed because Yahoo is valued at about $21 billion, making it too rich for anyone to handle on their own.

Any deal between the two companies would be a tough sell in Washington, D.C., considering that regulators in 2008 nixed a proposed search-advertising partnership between them. It may be that Google doesn’t really want to buy Yahoo but just wants to drive up the price that another buyer (for example, Microsoft, which is said to be weighing a bid) will have to pay.

Despite its travails, Yahoo still attracts an enormous audience—nearly 180 million visitors per month, making it the second-most-popular website in the U.S., after Google, according to researcher comScore. But financially it's hurting, with revenues declining 5 percent in its most recent quarter.

Like Google, Microsoft is rumored to be going after Yahoo by offering to provide financing for buyout firms, including Silver Lake Partners, that are interested in Yahoo. Putting up some money would give Microsoft or Google some influence over how Yahoo is run.

Another rumored suitor is Alibaba Group, a Chinese Internet company in which Yahoo holds a 40 percent stake. Others include AOL and Andreessen Horowitz, which according to AllThingsD was studying a bid for Yahoo in a deal that might also include Silver Lake Partners and DST Global, a Russian investment company.

With so many interested parties, it seems a sure bet that some kind of deal is going to happen, says Eric Jackson, founder of Ironfire Capital, a hedge fund that counts Yahoo as its biggest holding. “I think there will be a buyout, probably by January,” Jackson says.

The best deal, in Jackson’s opinion, would be one in which Microsoft, Andreessen Horowitz, and Alibaba all participate. “That way, [Alibaba CEO] Jack Ma gets his Alibaba Group stake back, the U.S. government doesn’t hassle him about owning the Yahoo core business, Microsoft keeps an interest in the core business, but it can be effectively run by Marc Andreessen as chair or CEO,” Jackson says.

Having Andreessen in charge would enable Yahoo to attract talent, he adds. Andreessen, who founded Netscape in the 1990s and later launched several other tech companies, is well regarded among techies in Silicon Valley.

Ma of Alibaba tangled with Yahoo earlier this year after it was revealed that he had spun off a key part of Alibaba to a private company he controls—and had done so without Yahoo’s knowledge.

The move reduced the value of Alibaba, and therefore the value of Yahoo’s investment in Alibaba, and therefore the value of Yahoo’s own stock. The worst part was that Yahoo management seemed to have had no idea any of this was going on. Eventually the dispute was resolved, but in a way that left Yahoo investors less than pleased.

“I think there will be a buyout, probably by January,” says Eric Jackson, founder of Ironfire Capital.

That experience has left investors wary about getting involved with Yahoo unless Ma is involved and the deal is structured in such a way that he can’t pull another move like that in the future, Jackson says. “You are going to want to have some assurances that you’re going to see some value from Alibaba and not have it suddenly transferred out of your control. People don’t want the rug pulled out from under them. Even Microsoft would likely want to know that they were aligned with Jack before doing the deal.”

The Alibaba fiasco was just the latest in a string of blunders at Yahoo, which has been a mess for years. In 2007 the company got rid of CEO Terry Semel, and cofounder Jerry Yang took over. Yang was a terrible leader whose biggest accomplishment was botching a $48.5 billion buyout offer from Microsoft.

In January 2009 Yang was replaced by Carol Bartz, whose biggest claim to fame was that she used the F word a lot and got blindsided by her supposed business partner, Jack Ma of Alibaba.

Bartz was fired in September, and right away the rumors started flying. The best one so far is that Yang himself wants to line up private-equity investors and take the company private, with himself at the helm.

The problem with that scenario is that Yang is the Inspector Clouseau of Silicon Valley—a complete incompetent who believes he is a genius. Putting him in charge of Yahoo (or anything, for that matter) would be disastrous from a business perspective. On the other hand, it would make for priceless entertainment. Stay tuned.