Yahoo's Demise: How a Bad CEO Can Sink a Good Stock
Marissa Mayer Shares Key Traits With Other Leaders of Failed Companies
When it comes to CEO senselessness—and how it can destroy shareholder value—few can spot funhouse mirrors in the C-suite better than Ted Prince. Based in Gainesville, Florida, and founder-CEO of the Perth Leadership Institute, he’s written several books about how CEOs make or break a bottom line. Looking at the sale of Yahoo to Verizon Communications for $4.8 billion, Prince contends that Yahoo’s downward spiral rests square on the shoulders of CEO Marissa Mayer, whose tenure was mired in controversy and criticism since she took the reins in July 2012. Here, Prince offers his views on how Mayer brought Yahoo down—and what it teaches us about pegging a CEO who will do investors more harm than good.
Can you identify unsuccessful CEOs before they sink a ship like Yahoo?
The answer is yes. But Wall Street analysts haven’t mastered the art because they’re too young and clueless about people’s behaviors.
Warren Buffett can do it because he gets it. But what’s “it?” Simply put, Buffett has mastered the art of reading people’s behavior to identify and assess whether they have a nose for profit. Obviously, Buffett and a very small number of other investors have “it.”
Compare that to the vast majority of people, who think you have to use traditional finance and financial data to get the job done. Of course, it doesn’t work. That’s why analysts are so badly wrong so very often, even when it’s very obvious that they're barking up the very wrong tree.
Take my current bête noir, Yahoo, and its teflon CEO, Marissa Mayer. You remember: the very one that wrote down $482 million on Tumblr this summer, bringing its total write-down to date to some $650 million.
Tumblr was, of course, the erstwhile Great White Hope when Yahoo acquired it in 2013. The write-downs probably make its value effectively zero.
Now Yahoo’s core assets have been sold to Verizon for $4.8 billion. While they were bundled into Big Yahoo, including the stakes in Alibaba (BABA) and Yahoo Japan, the market was essentially giving these assets a negative value.
So much for the hopes that people placed on the CEO when she was first appointed.
People should have known. Shortly after she was appointed CEO, the Wall Street Journal wrote that she was “signaling to employees that they should focus on creating better Web services rather than worry about corporate finances.”
But no one could have known that Mayer wasn't going to succeed at Yahoo, right? After all, she had been a shining star—actually a quasar—at Google, which lent her a sheen of success. But there was one big problem: Marissa Mayer, for all her bon mots, isn’t an innovator.
And if you're not an innovator, nothing you do or choose is going to get the astronomical gross margins and returns that you want from a winning Silicon Valley tech CEO.
What Should Company Boards Really Look For in a CEO?
This is where human emotion can fly in the face of time-tested truth. The then-board of Yahoo ascribed a halo to Mayer in large part because she happened to be one of the first employees at Google. But she had never founded anything, never sold anything, and never actually invented anything. She was a good, well-spoken manager who happened to be in the right place at the right time. It certainly didn’t hurt that she was a woman in a Silicon Valley culture that badly wanted to show the world it wasn’t just a male-dominated frat house.
Sure, she was smart. After all, she went to Stanford! And she was a computer engineer! So shouldn’t she have made a lot of money? Well...
It’s amazing how often apparently smart, educated people fall for the shibboleth that if you are smart and from a top university with a computer science degree, you're bound to hit the jackpot. But our research shows that educated people, in general, have lower business acumen than the less-educated.
What Miss Mayer was really, really good at was the business of self-promotion. She was articulate. She has an apparently illustrious background, having attended the best schools and having been hired by that Latinate of corporate achievers, Google. She was great at selling technical bling (as in Yahoo's many hopeless acquisitions). How else was she able to keep atop her lofty perch after continuously failing for four straight years in every way imaginable?
Beware the Self-Promoters
I’ve served on numerous boards whose CEOs were self-promoters—and it’s a sure-fire way for investors to identifying a loser.
Why? For starters, everything is about them and not the company. They even have that ineffable characteristic of being able to persuade otherwise sensible and rational people that they're going to bring the Millennium.
Self-promoters have that knack. And they can put it to their own self-aggrandizement even when it’s patently obvious in the cold light of day that it’s naught but a self-manufactured mirage. Whenever you see it, you can be sure company expenses are going to go through the roof.
So here’s a question for you good readers: How many people are out there like Marissa Mayer? How many CEOs are you aware of who might be highly articulate but who are nonetheless just corporate bureaucrats with big talk and great body language? All hat and no saddle, as the saying goes.
Bottom line: If you can figure that one out, you should short the companies they run immediately. That accounts for about half of your portfolio. As for the other half, check out what the CEO has actually achieved, as distinct from what they have done. That will account for most of the rest. I believe this to be the modern replacement for fundamental analysis. In other circles, it’s known as behavioral finance.
Bottom line: If you want to be an active investor, pay very close attention to the behavior and background of the CEO and management team. Forget their financials: If it looks and sounds too good to be true, it indubitably is.
Just ask Yahoo’s board ... while it lasts.
Dr. Ted Prince is CEO of the Perth Leadership Institute and author of “The Three Financial Styles of Very Successful Leaders” (McGraw Hill, 2005) and “Business Personality and Leadership Success” (Amazon Kindle, 2011). He holds a Ph.D. from Monash University in Australia.
The opinions expressed in this article are the author's own and do not necessarily represent the views of the Balance.