The Only Way Marissa Mayer Can Avoid Yahoo's "Kodak Moment"

When folks ask me why I'm such a business-news junkie, I point to the up-and-down sagas like the one that continues to play out at the Marissa Mayer-helmed Yahoo Inc. (Nasdaq: YHOO).

Thanks to Yahoo's pre-IPO stake in Alibaba Group Holding Ltd. (NYSE: BABA), the long-suffering shareholders of that wheezing Internet pioneer found themselves with a $40 billion windfall when China's top e-commerce firm went public in September 2014.

Not only was it a terrific drama, but my Private Briefing readers got the chance to clean up on the 50%+ rocket ride Yahoo shares took that year.

So watching Team Mayer fumble that victory - transforming it into another period of deep shareholder pain - has been profoundly disappointing.

But here's the good news.

I know exactly what Mayer needs to do to save Yahoo and its shareholders from absolute ruin.

You see, I've seen this before...

This Funeral Started as a Party

I used to cover Eastman Kodak Co. (NYSE: KODK).

And I was there to see the company, in essence, write its own obituary as a Fortune 500 company.

The Chicago Tribune referred to it - in a big headline - as "the Big Gamble."

The date was March 28, 1995, and on that day at a special "event" for investors, media, and customers in San Francisco, Calif., Kodak unveiled a sweeping plan that was supposed to break the film giant's stodgy bonds and vault it into the exciting new market for digital cameras, printers, and Internet imaging.

For a business journalist like me, the glitzy, executive-laden, and highly choreographed event was a lot of fun to cover.

But the whole strategy just didn't sit well with the one guy whose opinion really counted... Prudential Securities analyst B. Alex Henderson.

Every stock has an "ax" - Wall Street lexicon for the sell-side analyst whose opinion matters more than any other. Every widely followed company has an "ax." And they're worth watching - if only for the influence they wield.

On Kodak, Henderson was "the ax."

And he wasn't buying what Kodak was dishing out.

What Henderson Saw That No One Else Did

Kodak, you see, was hot-to-trot for the emerging digital market. It had fired its homegrown CEO and hired Motorola Solutions Inc. (NYSE: MSI) CEO George M.C. Fisher - betting that the wireless whiz-kid could do for digital cameras at Kodak what he'd done with cellphones at Motorola.

But Prudential's Henderson had been saying for months that Kodak lacked the innovative, quick-to-market culture the emerging Internet realm demanded for success. The "March 28 Event" - as it became known in Kodak lore - was the proverbial final straw.

For some time, Henderson had been pushing Kodak to go in a very different direction.

Indeed, he pronounced that Kodak should ditch digital and embrace what he referred to as the "Harvest Strategy" - an approach where the company would slash spending on research and development (R&D) and advertising, would cut the work force... and manage the company for cash flow only.

A company traveling that path uses that cash flow for ongoing share buybacks and "serial" dividend increases. And though it can take some time, the firm ultimately shrinks its way to the grave.

When the company's "time" finally arrives, the leaders turn out the lights, lock the door... and turn over the remaining pile of cash to shareholders.

For a public company in the "Greed Is Good" kingdom known as Corporate America, the "Harvest Strategy" at first seems counterintuitive.

In hindsight, however, Henderson was probably right.

Kodak possibly bought itself a few years. But even under the very clever Fisher, it quickly became apparent that the Rochester, N.Y., firm was a plodder, not a sprinter. And it couldn't keep pace with its newer, faster, and more agile digital rivals.

Deep job cuts became necessary anyway, billions were wasted in an effort to make the company something it wasn't, and untold billions in shareholder wealth were flushed away.

Here's the Smart Play

I see the exact same risk with Yahoo. And that's why I think Mayer should liquidate every part of the company that's not Alibaba - and just turn everything over to the shareholders.

They can do better with the money - investing it on their own - than she will on their behalf.

Mayer's turnaround track record at Yahoo hasn't been a good one. (A while back, in fact, Forbes detailed Mayer's miscues in a report headlined "How Do You Solve a Problem Like Marissa?" - a tongue-in-cheek reference to the "Sound of Music" show tune "How Do You Solve a Problem Like Maria?")

Investors have been terrified that - given this multibillion-dollar windfall that accompanied Yahoo's good fortune to be an early Alibaba investor - Mayer would squander the capital that could otherwise enrich Yahoo's long-suffering shareholders.

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A liquidation strategy, I believe, will blunt such a threat.

The company can find a "vehicle" to preserve the Alibaba value... but dumping the rest of the company is the right move to make.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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