Courtesy of Benzinga.
“A lot of ex-employees believe that there is enormous fat there to cut and that it might even be possible to cut it down by half,” Eric Jackson, founder and managing member of Ironfire Capital, told Benzinga. “But that’s a huge, dramatic endeavor to cut that many people. 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.”
Jackson was particularly baffled by the fact that Yahoo! (NASDAQ: YHOO) still employs 1,800 within its search division. “I don’t know what these people do,” said Jackson. “The whole justification of the search deal with Microsoft (NASDAQ: 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.”
“There’s part of the business that’s involved in media and there’s some ad technology platforms that they’re talking about getting rid of as well,” Jackson continued. “You could very easily, just from those two places alone, take another 3,000 out of the business. I think that would be the start.”
When asked if too many cuts could actually turn off some investors, Jackson said that he thinks most investors “want to see cost rationalization.”
“They just don’t see why this business needs, with contractors and before the jobs cuts, you’re talking almost 20,000 people that worked at this company,” said Jackson. “AOL (NYSE: AOL) or IACI (NASDAQ: IACI), those companies — if you minus out the patch people — you’re talking 3,000 to 4,000 people headcount at both of those companies. [For Yahoo!] 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.”
Ultimately, Jackson said that while Yahoo!’s core business has been shrinking, the company is still profitable. “It’s got $1.5 billion in trailing 12-month EBITDA,” he said. “If you made those cuts of the 5,000 people….you’re talking about $700 million to $900 million in annual savings, which would flow into additional EBITDA. 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. Absolutely they’re gonna be supportive of it.”
“I think it’s been kind of a dance around Yahoo! for these last few months,” Jackson added. “When private equity was looking at Yahoo!, I’m sure that they were — I know that for a fact they were looking at making massive job cuts. I know that the board looked at this. I know other investors talked about this. It’s kind of a sensitive topic to talk about publicly because obviously it’s dealing with people’s lives. You don’t want to negatively affect morale, so you don’t necessarily want to talk about it openly. But it’s definitely on everybody’s target list of levers that can be pulled to increase value at Yahoo!”
Hiring Spree
If you’re wondering how Yahoo! wound up with so many employees, you’re not alone. But the reason is far simpler than you might expect. “It’s just always grown,” Jackson explained. “If you go back — and you can track this in the 10-Ks year after year — the headcount continues to go up.”
During Carol Bartz’s time as Yahoo!’s chief executive, many believed that she eliminated several jobs within the firm. “She did let go of something like 3% of the workforce in one year, and 4% in the depths of the financial crisis,” said Jackson. “But even in those years, there were always additional hires that offset that so the actual total headcount goes up each and every year.
“So I think it’s a combination of weak leadership. And I think Jerry Yang [co-founder and former CEO of Yahoo!] is the kind of guy that finds making hard decisions, I think, really difficult. As long as he was there as a co-founder, I think the CEO didn’t want to make Jerry upset. So they kind of stride away from making those tough decisions.”
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. “They’ve done some other stuff — they’ve launched some standalone, kind of independent comedy specials and shows. They put on a Bill Maher concert. It’s original content that has gotten a lot of traffic. I think video definitely holds a lot of promise for Yahoo! and is probably going to be expanded now.”
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
Since most of us aren’t patent lawyers, Jackson said that it’s difficult for any of us to accurately assess the patent dispute between Yahoo! and Facebook (NASDAQ: FB).
“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.”
“In addition to giving cash over to Yahoo!, what could also happen is, Facebook agrees to give kind of a smaller amount up front but agrees to do it over time, so it becomes an annuity,” Jackson continued. “If it was in the hundreds of millions of dollars every year, I think Yahoo! investors would be very excited about that. If Facebook was, as part of the deal, able to get patent protection from Yahoo!’s portfolio that would help it against other people coming around and trying to take a shot [at them], it’s worth it for them to settle.”
Further, Jackson said that if AOL (NYSE: AOL) got a billion for its patents, Yahoo! could potentially get more. “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. There were a lot of question marks before they struck the deal [regarding] if this was even feasible. How do you continue to have a standalone business if you [sell] off your patents? There’s nothing left.
“What AOL did to get around that deal was [sell] it to Microsoft (NASDAQ: MSFT), but then they 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. It was a really smart deal that kind of got the value for those patents but didn’t leave them in a vulnerable state. It might very well lead to a new trend where other companies, like Yahoo! and maybe somebody else like RIM (NASDAQ: RIMM), tries to do that.”
Follow me @LouisBedigian
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