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Yahoo to lay off 15% of workforce amid $400M cost-cutting

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Mike Snider and Kaja Whitehouse, USA TODAY
6:51 p.m. EST February 2, 2016

Struggling search engine company Yahoo Inc. said it plans to cut about 15% of its workforce as part of a $400 million cost-cutting effort intended to "simplify" the troubled Net company.

The Sunnyvale, Calif.-based Yahoo plans to lay off about 1,500 employees and close five offices in Dubai, Mexico City, Buenos Aires, Madrid, and Milan — with the bulk of cuts by the end of March, Yahoo said Tuesday.

By the end of 2016, the online and mobile advertising company expects to have about 9,000 employees and fewer than 1,000 contractors, down from closer to 12,000 last year.

The cuts were announced as part of Yahoo's newly announced strategic refocus to " simplify the company" amid criticisms that Mayer has failed to grow it through acquisitions and hiring. In addition to staff reductions, Yahoo will thin its online and mobile offerings to support those that generate the most revenue.

Also, as the company attempts to separate its Internet advertising and media business from its $25 billion stake in Chinese Net retailing giant Alibaba, Yahoo's board will entertain strategic proposals, which could potentially include either a sale of part of the company or a potential merger.

In all, Yahoo said it will reduce operating expenses by more than $400 million by the end of 2016 by dropping support for products like Yahoo Games. It also plans to raise as much as $1 billion in cash through the sale of non-strategic assets, including real estate.

“We believe a simplified Yahoo will increase shareholder value over the long term,” said CEO Marissa Mayer during a conference call Tuesday. “Having fewer products means we can improve those products faster and increase profitability and focus.”

However, the changes will also result in a “transition year” with lower revenue and earnings, she said.

Yahoo expects revenue after subtracting the cost of traffic acquisition will range, in the first quarter 2016, from $820 million to $820 million, a decline of at least 14%, and for fiscal year 2016 revenue of $3.4 billion to $3.6 billion, a 12% decline.

Yahoo (YHOO) shares fell about 2% in after hours trading to $28.44, however, as shareholders digested the new plan and the news that Charles Schwab has stepped down from the board, marking the second director to resign in just two months.

Board member Max Levchin departed in December. Shares closed Tuesday at $29.08 down 1.66%.

Yahoo Tuesday also reported fourth-quarter earnings of 13 cents, beating analysts' expectations of 12 cents per share, according to S&P Capital IQ Consensus Estimates. Fourth quarter revenue of $1 billion beat estimates of $948 million.

Mayer's plan to simply the business and cut costs is likely aimed at pleasing shareholders who have been calling on Mayer to concede that her turnaround plan has failed by putting the core Web businesses up for sale.

But some Yahoo shareholders said they were not impressed. Yahoo’s cost cutting plan “does not fully address the core issues which have destroyed shareholder value - poor capital allocation, bad strategic partnerships, out of control spending and a bloated workforce,” hedge fund firm SpringOwl said in an emailed statement.

“We are committed to continuing to push for moves that will fundamentally turn the company around and result in a higher stock price and value creation for all shareholders,” SpringOwl said.

Last month, hedge fund investor Starboard Value threatened a board battle unless “significant change” is made, including a new CEO and efforts to sell the company. Starboard — owners of 0.8% of Yahoo's outstanding shares — initially urged Yahoo to spin off its 15% Alibaba stake. But the value of that stake fell from $40 billion to about $25 billion and in November Starboard urged Yahoo to reconsider selling some of its core assets instead.

In advance of Tuesday's announcement, analysts' expectations of layoffs ranged from 10% to 25% of the company's nearly 11,000 estimated employees. With the company's board up for re-election this summer, there were expectations from Mayer and the board on Tuesday.

“The only thing to stop a proxy fight is if the board fires Mayer or announces it is exploring strategic alternatives,” said Eric Jackson, managing director of Yahoo shareholder SpringOwl. He also said Yahoo could stave off investor threats by announcing a partnership with a large strategic investor, like Verizon or Liberty Media.

"There's been a laundry list of people who have written letters to the board or spoken out publicly against (Mayer)," he said on CNBC Tuesday. "I think the reason why this company announced they were going to pursue strategic alternatives is because they realize they really don’t have a leg to stand on in terms of preventing someone from coming forward and launching a proxy fight by the end of March unless they do say this now."

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