As investors await news from Yahoo's December board meeting last week -- when directors, according to reports, were weighing options that included proceeding with a spin-off of its massive stake in Alibaba Group or selling its Internet business -- two themes have emerged again and again.
The other is whether it would have made much difference at all, given both the small size of Yahoo's Internet business compared with its huge stake in Chinese e-commerce giant Alibaba Group and the much-cited difficulty of managing successful tech company turnarounds. "History shows that struggling tech companies rarely regain momentum," noted a Reuters Breakingviews column published by the New York Times.
Why is it so hard for tech companies to manage the feat? It has happened, after all: Some have pointed to revivals at Priceline and eBay. And of course, there's what Lou Gerstner did at IBM in the 1990s, and Apple's remarkable rebirth under Steve Jobs' second go-round.
But NYU finance professor Aswath Damodaran, who studies valuation and corporate finance, says those are rare exceptions rather than the rule. In an interview with OnLeadership, he calls Steve Jobs' revival at Apple something few would -- "a great corporate tragedy" -- not because of what Apple achieved, but because of how it's been held up as a nearly impossible-to-reach model for other companies. "It's become the prototype that strategists use with companies to say 'you too can do this,' " he said.
Damodaran, who is a Yahoo stockholder and has written about Yahoo in the past, has little patience for such advice, or for sentimental reasons for companies to hang on, whatever pioneering place they may hold in an industry's history. "I think strategists go around telling companies that the objective of a company is to sustain itself, which I think is absurd," he said. "A corporation is a legal entity, and if the reason for your existence is done, why hang around?"
We spoke with him about why tech turnarounds are so rare, what he thinks of the job Mayer's done, and why we continue to obsess over superstar CEOs. Our discussion below was edited for space and clarity.
Q: Why is it so hard for tech companies to be turned around?
I think it’s really across the board for companies. It’s my thesis. What companies go through is a life cycle. They’re startups. They grow and mature. And then they decline.
Yet the first difference between tech companies and the rest is that everything happens in hyper-speed. They grow much faster, and don’t need the investment a [traditional] company needs. Look at Uber. But while you can grow much faster, you can also decline much faster. Think of BlackBerry. I’ve often said tech companies age in dog years. They age about five to seven times faster.
Yet there are standouts, like Apple under Steve Jobs, and IBM under Lou Gerstner.
What made Steve Jobs successful in his second lifetime as a CEO — people forget about the first lifetime and how it didn’t work out — is a congruence of events that all came together that made Apple possible. The fact that they had this great product. The fact that their competition was really crappy. The fact that entertainment companies and music companies had let Apple take their business away. It was a combination of things. I’m not sure you can recreate that combination at another tech company.
That’s my first reason I’m skeptical whenever I see somebody saying “well, Marissa Mayer, if only she had done this, this and this, would have been able to pull it off.” I think she did the best she could with the resources she had.
I fear what I call the Steve Jobs syndrome, which is we treat CEOs as stars if they bet the farm and succeed. And we punish CEOs who might be doing the right thing. In fact, my kudos to Ms. Mayer. I’m a Yahoo stockholder. The way I described this in a blog post a couple of years ago is my returns on Yahoo are going to be inversely proportional to Ms. Mayer’s ambitions. My biggest fear as a Yahoo investor is she’s going to try to do too much.
But she did make big investments. She spent a lot of money on Tumblr, for instance.
She could have made even bigger investments. That was my biggest fear. I think she learned a lesson from that, which is don’t keep doing this.
Look at HP, a company that’s been devastated by big acquisitions over the last decade, and now of course has finally gotten beyond the denial stage. That takes a long time for these tech companies to accept, because it’s so much fun being a growth company. Nobody wants to be a mature or a declining company. But just like as human beings we've got to accept you can’t do at 65 what you used to do at 45, and you can’t do at 45 what you used to do at 25, companies have to come to that recognition, too.
With tech companies I think it’s more difficult than most, because most of the people running these companies grew up in an age where growth was the driver for everything you did. It didn’t really matter what else happened. It requires a reorientation that many tech company CEOs aren’t able to make.
What do you think Yahoo's board should do?
I think the board should essentially sell the operating business to the best potential buyer. My guess is there’s somebody out there who could actually get more value out of it.
So you really think if Steve Jobs had come in and led Yahoo, he wouldn’t have been able to do anything?
I believe that this is a company where this has little to do with the quality of the CEO. The hand that Marissa Mayer was dealt was a bad one. The gambling analogy might actually be right, because with a bad hand you can go for it all and hope that something wonderful happens. But given a bad hand, the best thing to do sometimes is to fold. The Kenny Rogers song comes to mind.
But if tech turnarounds are so hard, what about IBM under Lou Gerstner [in the early 1990s]?
What made it different, I think, was that at IBM the problem was they thought of themselves still as a computer company. You had somebody from the outside going “you know what, you’re not a computer company anymore. You’re a business services company.” That was the source of that first rebirth of IBM.
Maybe there would have been time, eight or nine years ago at Yahoo, where somebody could have come in and said “you know, you’re not a search engine company anymore. You’ve got to be a social media company, or you've got to become a news company or an entertainment company” and it might have worked. But I think that moment came and went a long time ago. I don’t think it was a moment that was available to Marissa when she came in as CEO.
If all companies go through this life cycle, why do tech companies seem to fit the rule in particularly stark terms?
Part of the problem is the products tech companies produce are susceptible to sudden changes. Coca-Cola is soda. Soda is soda. So with consumer product companies, the pace of change is much slower simply because the products you’re producing are, in a sense, timeless.
With tech companies, that’s not true. The product you produce today might be the state of the art, but two years from now, who knows? Today we might think of the iPhone as the pinnacle of smartphone technology but if somebody comes up with a new way in which we can talk which looks very different from the smartphone, that can change. So one reason, I think, is the products and services that tech companies provide are more transient. They're more likely to be disrupted by new technologies coming in. That’s less true of most conventional consumer product companies.
But I think increasingly -- here's the reality -- even traditional businesses have a tech component to them. I have a hypothesis that going forward, even companies we used to think of as long-term, timeless companies might be more susceptible to change. I see it coming in the auto business and the entertainment business. Those, I think, are the next businesses where you’re going to see things move into hyper-speed.
Unlike Mayer, who is managing a company that owns such big stakes in Alibaba Group and Yahoo Japan, most CEOs have more control over moving the needle by making operational moves. Even in those situations when someone has all that control, are tech turnarounds still that difficult?
I think to manage by exception — which is basically what you have to do when you come into these companies — is always a dangerous thing. I’d much rather that they moderate their approach and they don’t try to bet the farm and essentially do the best they can with the hand they’ve been dealt. Less is more in these companies.
What’s an example?
BlackBerry is my classic example. In a sense it’s the perfect example of everything we’ve talked about: Of everything moving in hyper-speed. Of how you can go overnight from being a superstar to a company that can do nothing right. Of how, when that happens, a manager’s initial response is denial — the market’s wrong, they’re not getting it, it’s just great products. In a sense, to me, Blackberry and Apple operate at two ends of the spectrum. I think they’re both exceptional cases.
Why do you think we continue to have so much faith in the capability of the superstar CEO?
It’s human nature. We want things to become bigger, to grow. Look back in history. Look at the people who are considered the great kings. Or, I don’t know who the guy was after Winston Churchill in 1945 who became prime minister of the U.K. [Clement Attlee] and essentially presided over the dismantling of the British Empire. We give credit to the people who built empires, not who dismantled them. That’s I think part of how we create celebrities.
I understand where CEOs come from when they do it. But at the same time, if you’re the CEO of a publicly traded company, you have a fiduciary responsibility to do the best you can for that company’s stockholders. In a sense you have to put that instinct you have into the back seat and deal with reality as it is, rather than as you wished it would be.