Yahoo! Inc. 2009 Case Notes Prepared by: Dr.

Mernoush Banton Case Authors: Hamid Kazeroony

A.

Case Abstract

Yahoo! Inc. (www.yahoo.com) is a comprehensive strategic management case that includes the companys Calendar year-end December 31, 2008 financial statements, competitor information and more. The case time setting is the year 2009. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Sunnyvale in the U.S. state of California, Yahoo! Inc. is traded on the New York Stock Exchange under ticker symbol YHOO.

B.

Vision Statement (Actual)

Yahoo! powers and delights our communities of users, advertisers, and publishers all of us united in creating indispensable experiences, and fueled by trust.

C.

Mission Statement (Actual)

To connect people to their passions, their communities, and the world's knowledge. To ensure this, Yahoo offers a broad and deep array of products and services to create unique and differentiated user experiences and consumer insights by leveraging connections, data, and user participation. Companys Values, as stated on their website: Excellence: We are committed to winning with integrity. We know leadership is hard won and should never be taken for granted. We aspire to flawless execution and don't take shortcuts on quality. We seek the best talent and promote its development. We are flexible and learn from our mistakes. (2, 5, 6, 9) Innovation: We thrive on creativity and ingenuity. We seek the innovations and ideas that can change the world. We anticipate market trends and move quickly to embrace them. We are not afraid to take informed, responsible risk. (4) Customer Fixation: We respect our customers above all else and never forget that they come to us by choice. We share a personal responsibility to maintain our customers' loyalty and trust. We listen and respond to our customers and seek to exceed their expectations. (1, 3)

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Teamwork: We treat one another with respect and communicate openly. We foster collaboration while maintaining individual accountability. We encourage the best ideas to surface from anywhere within the organization. We appreciate the value of multiple perspectives and diverse expertise. (8) Community: We share an infectious sense of mission to make an impact on society and empower consumers in ways never before possible. We are committed to serving both the Internet community and our own communities. (7) Fun: We believe humor is essential to success. We applaud irreverence and don't take ourselves too seriously. We celebrate achievement. We yodel. 1. 2. 3. 4. 5. 6. 7. 8. 9. Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

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D.

External Audit

CPM Competitive Profile Matrix

Critical Success Factors Advertising Service / Product Quality Price Competitiveness Management Financial Position Customer Loyalty Product Lines Market Share Customer Service Technology Employees Global Expansion Total

Weight 0.10 0.10 0.07 0.06 0.09 0.10 0.08 0.10 0.07 0.10 0.05 0.08 1.00

Yahoo Weighte Rating d Score 3 3 3 2 2 3 3 3 3 3 3 3 0.30 0.30 0.21 0.12 0.18 0.30 0.24 0.30 0.21 0.30 0.15 0.24 2.85

Google Weighte Rating d Score 4 4 2 4 3 4 4 4 4 4 2 4 0.40 0.40 0.14 0.24 0.27 0.40 0.32 0.40 0.28 0.40 0.10 0.32 3.67

Microsoft Weighted Rating Score 1 2 1 3 4 2 2 2 2 2 1 2 0.10 0.20 0.07 0.18 0.36 0.20 0.16 0.20 0.14 0.20 0.05 0.16 2.02

Opportunities 1. 1.1 billion Internet users around the world as of 2006 and it is still growing 2. Internet advertising revenues in the U.S. remain strong, topping US$23 billion in 2008 3. Consumers are spending more of their time online 4. New business strategies such as bundling Internet access with voice and video services are increasing 5. Innovation in technology is the driving force in Internet-based businesses 6. Many businesses overseas are finding advertising on Internet less expensive and more responsive 7. Countries such as China and India have stronger economic status and accordingly the companies are able to spend more advertising dollars via Internet Threats 1. Due to weak economic conditions, Internet-related businesses also have suffered 2. In 2009, a number of Internet content and advertising companies reported disappointing financial results and lowered their forward financial outlooks

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3. Low entry barrier makes the viability of existing Internet-based businesses difficult 4. Changes in legislative requirements concerning technology sharing, patent rights and information security could increase future expenses and lower profitability 5. Constant technology changes causes difficulty in being up-to-date all the time 6. Consolidations among Internet-based providers could make the competition stronger External Factor Evaluation (EFE) Matrix Key External Factors Opportunities 1. 1.1 billion Internet users around the world as of 2006 and it is still growing 2. Internet advertising revenues in the U.S. remains strong, topping US$23 billion in 2008 3. Consumers are spending more of their time online 4. New business strategies such as bundling Internet access with voice and video services are increasing 5. Innovation in technology is the driving force in Internet-based businesses 6. Many businesses overseas are finding advertising on Internet less expensive and more responsive 7. Countries such as China and India have stronger economic status and accordingly the companies are able to spend more advertising dollars via Internet Threats 1. Due to weak economic conditions, Internetrelated businesses also have suffered 2. In 2009, a number of Internet content and advertising companies reported disappointing financial results and lowered their forward financial outlooks 3. Low entry barrier makes the viability of existing Internet-based businesses difficult 4. Changes in legislative requirements concerning technology sharing, patent rights and information security could increase future expenses and lower profitability 0.1 0.08 0.08 0.09 0.07 0.09 0.07 4 3 3 2 2 3 2 0.4 0.24 0.24 0.18 0.14 0.27 0.14 Weight Rating Weighted Score

0.09 0.07

3 2

0.27 0.14

0.06 0.07

2 3

0.12 0.21

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5. Constant technology changes causes difficulty in being up-to-date all the time 6. Consolidations among Internet-based providers could make the competition stronger Total

0.08 0.05 1.00

2 2

0.16 0.1 2.61

Positioning Map
Number of Visitors (High)

Google Yahoo

Narrow Product Line Offering

Microsoft
Wide Product Line Offering

Number of Visitors (Low)

E.

Internal Audit
Strengths 1. Increase in revenue from 2007 to 2008 by 3.4 percent to US$7.2 billion 2. Yahoo is the second leading global Internet brand 3. Other than offering advertising and online properties, the company offers Internet access through third-party entities 4. Other than advertising fees, Yahoo generates additional revenue by charging fees for a range of premium services 5. With additional lay-offs, the company anticipates having a better profitability for the next few years

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6. Within Internet base service, Yahoo! has several revenue generated segments such as Search, Display Related, Classified, Referrals/Lead Generation and Email 7. Companys quick ratio is 2.78, above industry average Weaknesses 1. The net income decreased by 35.7 percent to US$424 million. 2. Overall advertising revenue dropped by 13 percent in the second quarter of 2009 compared to the previous year 3. Yahoo! closed several of its video properties and is planning to close twenty video services including its social network site Yahoo! 360 and its web hosting service GeoCities 4. Companys capital lease and other long-term liabilities increased by over US$48 million 5. Microsoft has tried to acquire Yahoo! twice in the last three years Financial Ratio Analysis (October 2009) Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Profit Margins % Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) 5Yr PreTax Margin (5-Year Avg.) 5Yr Net Profit Margin (5-Year Avg.) Financial Condition Yahoo! -11.80 -55.30 242.70 34.71 12.27 NA Yahoo! -11.80 -55.30 242.70 34.71 12.27 NA Yahoo! 56.3 3.0 -1.4 59.3 19.6 11.9 Yahoo! Industry 7.60 13.20 46.30 69.97 87.09 NA Industry 7.60 13.20 46.30 69.97 87.09 NA Industry 62.2 27.1 20.6 60.7 30.4 22.9 Industry S&P 500 -5.20 -8.10 24.70 12.97 12.30 11.88 S&P 500 -5.20 -8.10 24.70 12.97 12.30 11.88 S&P 500 38.2 9.9 6.9 38.1 16.5 11.5 S&P 500

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Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Adapted from www.moneycentral.msn.com Avg P/E 12/08 12/07 12/06 12/05 12/04 12/03 12/02 12/01 12/00 12/99 72.40 58.90 58.10 27.70 51.60 84.20 87.20 -110.60 1016.10 1153.40 Debt/ Equity 0.00 0.08 0.08 0.09 0.11 0.17 0.00 0.00 0.00 Price/ Sales 2.37 4.69 5.79 11.07 15.31 18.16 10.47 14.09 16.54 219.19

0.01 3.4 3.4 NA 1.2 8.69

0.01 9.7 9.7 0.0 1.1 85.16

1.11 1.5 1.2 27.2 3.5 21.58

Price/ Book 1.51 3.25 3.79 6.54 7.34 6.82 4.30 5.19 8.90 92.37 Return on Assets (%) 3.1 5.4 6.5 17.5 9.1 4.0 3.8 -3.9 3.1 3.1

Net Profit Margin (%) 5.9 9.5 11.7 36.1 23.5 14.6 11.2 -12.9 6.4 8.1 Interest Coverage NA NA NA NA NA NA NA NA NA NA

Book Value/ Share 12/08 12/07 12/06 12/05 12/04 12/03 12/02 12/01 12/00 $8.09 $7.16 $6.73 $5.99 $5.13 $3.30 $1.90 $1.71 $1.69

Return on Equity (%) 3.8 6.9 8.2 22.1 11.8 5.5 4.7 -4.7 3.7

12/99 $1.17 0.04 3.8 Adapted from www.moneycentral.msn.com Internal Factor Evaluation (IFE) Matrix Key Internal Factors Strengths 1. Increase in revenue from 2007 to 2008 by 3.4 percent to US$7.2 billion

Weight

Rating

Weighted Score

0.07

0.14

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2. Yahoo is the second leading global Internet brand 3. Other than offering advertising and online properties, the company offers Internet access through third-party entities 4. Other than advertising fees, Yahoo generates additional revenue by charging fees for a range of premium services 5. With additional lay-offs, the company anticipates having a better profitability for the next few years 6. Within Internet base service, Yahoo! has several revenue generated segments such as Search, Display Related, Classified, Referrals/Lead Generation and Email 7. Company's quick ratio is 2.78, above industry average Weaknesses 1. The net income decreased by 35.7 percent to US$424 million. 2. Overall advertising revenue dropped by 13 percent in the second quarter of 2009 compared to the previous year 3. Yahoo! closed several of its video properties and is planning to close twenty video services including its social network site Yahoo! 360 and its web hosting service GeoCities 4. Company's capital lease and other long-term liabilities increased by over US$48 million 5. Microsoft has tried to acquire Yahoo! twice in the last three years Total

0.1 0.07 0.09 0.06 0.08

4 4 3 4 4

0.4 0.28 0.27 0.24 0.32

0.1

0.4

0.08 0.1 0.08

2 2 2

0.16 0.2 0.16

0.08 0.09 1.00

2 2

0.16 0.18 2.91

F.

SWOT Strategies
Strengths 1. Increase in revenue from 2007 to 2008 by 3.4 percent to US$7.2 billion 2. Yahoo is the second Weaknesses 1. The net income decreased by 35.7 percent to US$424 million. 2. Overall advertising

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3.

4.

5.

6.

7.

leading global Internet brand Other than offering advertising and online properties, the company offers Internet access through third-party entities Other than advertising fees, Yahoo generates additional revenue by charging fees for a range of premium services With additional lay-offs, the company anticipates having a better profitability for the next few years Within Internet base service, Yahoo! has several revenue generated segments such as Search, Display Related, Classified, Referrals/Lead Generation and Email Companys quick ratio is 2.78, above industry average

revenue dropped by 13 percent in the second quarter of 2009 compared to the previous year 3. Yahoo! closed several of its video properties and is planning to close twenty video services including its social network site Yahoo! 360 and its web hosting service GeoCities 4. Companys capital lease and other long-term liabilities increased by over US$48 million 5. Microsoft has tried to acquire Yahoo! twice in the last three years

Opportunities 1. 1.1 billion Internet users around the world as of 2006 and it is still growing 2. Internet advertising revenues in the U.S. remains strong, topping US$23 billion in 2008 3. Consumers are spending more of their time online 4. New business strategies such as bundling Internet access with voice and video services are increasing 5. Innovation in technology is the driving force in Internet-based businesses 6. Many businesses overseas are finding

S-O Strategies 1. Implement a vertical or horizontal integration (forward or backward) of a company that has global presence (S2, S6, S7, O1, O2, O3, O4, O5) 2. Increase advertising spending by additional 10 percent on fee based segments (S7, O4) 3. Cutback prices on advertising and fee-based segment by 2 percent (S7, O1, O2)

W-O Strategies 1. Acquire innovative technology/Internetrelated businesses using a combination of cash and debt (W3, W5, O2, O4, O5) 2. Sell off low profit segments and pay down the long term debt (W4, O1)

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advertising on Internet less expensive and more responsive 7. Countries such as China and India have stronger economic status and accordingly the companies are able to spend more advertising dollars via Internet

Threats 1. Due to weak economic conditions, Internetrelated businesses also have suffered 2. In 2009, a number of Internet content and advertising companies reported disappointing financial results and lowered their forward financial outlooks 3. Low entry barrier makes the viability of existing Internet-based businesses difficult 4. Changes in legislative requirements concerning technology sharing, patent rights and information security could increase future expenses and lower profitability 5. Constant technology changes causes difficulty in being up-to-date all the time 6. Consolidations among Internet-based providers could make the competition stronger

S-T Strategies 1. Offer new marketing data collection for advertisers (S2, S6, T2) 2. Create additional bundling partnership for sound or video streaming (S3, T3, T5)

W-T Strategies 1. Improve innovation to protect the companys technology, patent rights and information security (W3, W4, T4)

G.

SPACE Matrix

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FS
Conservative
7 6 5 4 3 2 1

Aggressive

CS

IS
-7 -6 -5 -4 -3 -2 -1 -1 -2 -3 -4 -5 -6 1 2 3 4 5 6 7

Defensive

-7

Competitive

ES
Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow Financial Stability (FS) Average Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competitions Capacity Utilization Technological Know-How 6 5 6 6 6 5.8 Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry Environmental Stability (ES) Average Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential Industry Stability (IS) Average -5 -3 -3 -2 -6 -3.8

-1 -1 -2 -2 -2

6 5 2 5 6 4.8

Competitive Stability (CS) -1.6 Average Y-axis: FS + ES = 5.8 + (-3.8) = 2.0 X-axis: CS + IS = (-1.6) + (4.8) = 3.2

H.

Grand Strategy Matrix

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Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Quadrant III

Slow Market Growth

Quadrant IV

1. 2. 3. 4. 5. 6. 7.

Market Development Market Penetration Product Development Forward Integration Backward Integration Horizontal Integration Related Diversification

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I.

The Internal-External (IE) Matrix

The IFE Total Weighted Score Strong 3.0 to 4.0 I Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

High 3.0 to 3.99

IV

IV

VI

The EFE Total Weighted Score

Medium 2.0 to 2.99 VII

Yahoo! Stores, Inc.

VIII

IX

Low 1.0 to 1.99

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J.

QSPM
Acquire an Internetbased business (horizontal or vertical integration, backward or forward) AS TAS 4 3 4 --3 4 4 0.4 0.24 0.32 --0.21 0.36 0.28

Key Factors Opportunities 1. 1.1 billion Internet users around the world as of 2006 and it is still growing 2. Internet advertising revenues in the U.S. remains strong, topping US$23 billion in 2008 3. Consumers are spending more of their time online 4. New business strategies such as bundling Internet access with voice and video services are increasing 5. Innovation in technology is the driving force in Internet-based businesses 6. Many businesses overseas are finding advertising on Internet less expensive and more responsive 7. Countries such as China and India have stronger economic status and accordingly the companies are able to spend more advertising dollars via Internet Threats 1. Due to weak economic conditions, Internetrelated businesses also have suffered 2. In 2009, a number of Internet content and advertising companies reported disappointing financial results and lowered their forward financial outlooks 3. Low entry barrier makes the viability of existing Internet-based businesses difficult 4. Changes in legislative requirements concerning technology sharing, patent rights and information security could increase future expenses and lower profitability 5. Constant technology changes causes difficulty in being up-to-date all the time 6. Consolidations among Internet-based providers could make the competition stronger TOTAL Strengths 1. Increase in revenue from 2007 to 2008 by 3.4 percent to US$7.2 billion

Weight 0.1 0.08 0.08 0.09 0.07 0.09 0.07

Increase advertising spending by additional 10 percent on fee-based segments AS TAS 2 4 2 --2 3 3 0.2 0.32 0.16 --0.14 0.27 0.21

0.09 0.07

3 2

0.27 0.14

2 1

0.18 0.07

0.06 0.07

2 ---

0.12 ---

4 ---

0.24 ---

0.08 0.05 1.00 0.07

--4

--0.20 2.74

--1

--0.05 1.89

0.07

0.21

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2. Yahoo is the second leading global Internet brand 3. Other than offering advertising and online properties, the company offers Internet access through third-party entities 4. Other than advertising fees, Yahoo generates additional revenue by charging fees for a range of premium services 5. With additional lay-offs, the company anticipates having a better profitability for the next few years 6. Within Internet base service, Yahoo! has several revenue generated segments such as Search, Display Related, Classified, Referrals/Lead Generation and Email 7. Company's quick ratio is 2.78, above industry average Weaknesses 1. The net income decreased by 35.7 percent to US$424 million. 2. Overall advertising revenue dropped by 13 percent in the second quarter of 2009 compared to the previous year 3. Yahoo! closed several of its video properties and is planning to close twenty video services including its social network site Yahoo! 360 and its web hosting service GeoCities 4. Company's capital lease and other long-term liabilities increased by over US$48 million 5. Microsoft has tried to acquire Yahoo! twice in the last three years SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

0.1 0.07 0.09 0.06 0.08

4 3 3 --3

0.4 0.21 0.27 --0.24

3 2 4 --4

0.3 0.14 0.36 --0.32

0.1

0.4

0.3

0.08 0.1 0.08

3 4 ---

0.24 0.4 ---

1 2 ---

0.08 0.2 ---

0.08 0.09 1.00

2 ---

0.16 --2.39 5.13

3 ---

0.24 --2.15 4.04

K.

Recommendations
Acquire an Internet-based business for approximately US$1 billion (all cash or half in cash) that has high presence in areas such as China, India, or Europe, by implementing a vertical or horizontal integration (backward or forward).

L.

EPS/EBIT Analysis

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US$ Amount Needed: $500 million Stock Price: US$15.00 Tax Rate: 27.4% Interest Rate: 5% # Shares Outstanding: 1,391,560,000 Common Stock Financing Recession Normal Boom $1,000,000,00 $300,000,000 $600,000,000 0 0 0 0 300,000,000 600,000,000 1,000,000,000 8,220,000,00 16,440,000,00 27,400,000,00 0 0 0 7,920,000,00 15,840,000,00 26,400,000,00 0 0 0 1,424,893,33 3 1,424,893,333 1,424,893,333 5.56 11.12 18.53 70 Percent Stock - 30 Percent Debt Recession Normal Boom $1,000,000,00 $300,000,000 $600,000,000 0 20,000,000 20,000,000 20,000,000 280,000,000 580,000,000 980,000,000 7,672,000,00 15,892,000,00 26,852,000,00 0 0 0 7,392,000,00 15,312,000,00 25,872,000,00 0 0 0 1,414,893,33 3 1,414,893,333 1,414,893,333 5.22 10.82 18.29 Debt Financing Normal $600,000,000 25,000,000 575,000,000 15,755,000,00 0 15,180,000,00 0 1,391,560,000 10.91

Recession $300,000,000 25,000,000 275,000,000 7,535,000,00 0 7,260,000,00 0 1,391,560,00 0 5.22

Boom $1,000,000,000 25,000,000 975,000,000 26,715,000,000 25,740,000,000 1,391,560,000 18.50

EBIT Interest EBT Taxes EAT # Shares EPS

70 Percent Debt - 30 Percent Stock Recession Normal Boom $300,000,000 5,000,000 295,000,000 8,083,000,00 0 7,788,000,00 0 1,401,560,00 0 5.56 $600,000,000 5,000,000 595,000,000 16,303,000,00 0 15,708,000,00 0 1,401,560,000 11.21 $1,000,000,000 5,000,000 995,000,000 27,263,000,000 26,268,000,000 1,401,560,000 18.74

EBIT Interest EBT Taxes EAT # Shares EPS

M.

Epilogue

Taobao, China's largest online retailer, is owned by Alibaba Group, which is 40 percent owned by U.S. search titan Yahoo Inc. It is launching a mobile phone in partnership with Lenovo Mobile to tap into rising demand for mobile shopping. The phone, which will be preloaded with Taobao applications, will enable users to shop wirelessly and will be launched within a month, targeted at the Chinese market, the source said, speaking on condition of anonymity because the plan is not yet public. Alibaba Group is also parent of China's largest e-commerce website www.Alibaba.com. In November, 2009, Microsoft and Yahoo released information that the antitrust authorities in Canada and Australia have given the green light to both companies if they wish to merge. Obviously, such approval has not been granted by the U.S.

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Justice Department which is reviewing the deal, but in a joint statement, Microsoft and Yahoo say they "remain hopeful that the agreement will close in early 2010."

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