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Yahoo restructuring is biggest yet, radical steps needed, analysts say

April 04, 2012|By Jessica Guynn
  • Yahoo Inc. said it will cut about 2,000 employees from its workforce of 14,000.
Yahoo Inc. said it will cut about 2,000 employees from its workforce of 14,000. (David Paul Morris / Getty…)

Yahoo Inc.'s decision to slash 14% of its workers is the biggest restructuring in the company's history, an analyst said.

About 2,000 workers will be laid off, the Sunnyvale, Calif., company said Wednesday. It expects to record a pretax expense of $125 million to $145 million, most of which will come in the second quarter.

"It may be the only way CEO [Scott] Thompson can effectively focus on the next generation of Yahoo," Think Equity analyst Ronald Josey said in an research note.

He added: "While we believe today's actions should improve overall operating margins -- which we project to fall to 450 bps in 1Q12 to 13.3% given increased investments -- we are more focused on revenue growth which has proven elusive and has declined every year since 2009 given increased competition and share losses in the domestic display market."

It's the most decisive move yet from Thompson, who took over as chief executive in January. He is reorganizing the company in a bid to pull it out of a sales slump that has seen it lose ground in online advertising to social networking giant Facebook and Internet search giant Google. Yahoo had revenue of $4.98 billion last year.

Yahoo's share of overall U.S. online ad revenues, which reached 15.7% in 2009, declined to just 9.5% last year, according to research firm EMarketer. And, even as the online ads market is expected to expand 23.3% to $39.5 billion in 2012, Yahoo's share of revenues are expected to decline even further, to 7.4%, EMarketer says.

Thompson will have to take radical steps to remake the company, not just to slash jobs, analysts said.

“It’s easy to come in and cut heads. Profitability is no longer the issue with Yahoo. You can’t cut your way to revenue growth,” BGC Partners analyst Colin Gillis said. “That’s the piece we are all looking for where Scott Thompson can show some innovation and vision.”

Thompson came to Yahoo from EBay’s PayPal unit, where he served as president. He more than doubled revenue at the payments service and increased users to more than 100 billion.

But Thompson must also wrestle with a proxy fight from investor Third Point, which owns about 5.8% of Yahoo. The hedge fund is trying to get four of its own nominees, including its CEO Daniel Loeb, onto Yahoo's board of directors.

Yahoo failed to reach an agreement with Third Point and instead added three independent directors of its own last month. It also added two directors in February and announced that board Chairman Roy Bostock and three other directors would not seek reelection.

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Analyst: Yahoo restructuring is biggest yet; radical action needed

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