What does it take to turn around a Web company? A look inside the only two we’ve ever seen

What does it take to turn around a Web company? A look inside the only two we’ve ever seen


ON MARCH 1, 2013

Every time a has-been startup like MySpace or Digg or a big public company like Yahoo or AOL attempts a Web turnaround, the tech media is quick to remind them that Web turnarounds never work.

Technically, we can’t say that anymore. Two companies– Priceline and eBay– have quietly proven that truism wrong, at least from a financial point of view.

Are they anomalies or has it just taken this long to see a turnaround work?

We forget that as industries go, the Web is a young one. The first Web site appeared only 21 years ago. That’s enough time for countless Web startups to appear, for far fewer to succeed and for a subset of those successes to fall on hard times. But it’s hardly enough time to produce any successful case studies in corporate turnarounds.One reason is that turnarounds usually take several years at best to execute. In the broader and older technology industry, there are some classic examples: Steve Jobs returning to Apple, Lou Gerstner righting the ship at IBM. It wasn’t until 2004 or 2005 that the Apple turnaround began to bereflected in the stock price. It took Gerstner nearly a decade to transform IBM from an troubled mainframe company to a thriving software and IT services giant.

In the Web industry, companies can appear and disappear in the space of several years. So there have been few decisive turnarounds. There is Priceline, which went from a rising Web star to a dot-com joke to – in time – the largest online-travel company. And, more recently, there is eBay’s unlikely comeback. Both companies are in e-commerce, one of the first areas of the Web to take off and draw in a critical mass of mainstream consumers. And, oddly enough, a category that has been slow to develop a new generation of giants. Only Zappos has had a $1 billion exit since the bubble burst.

Another early area of success for the Web was content, but the evolution of Web content is far from mature and in fact has seen its evolutionary pace accelerate with the rise of social networks. There are a couple of notable companies that are in the midst of possible turnarounds, such as AOL and Yahoo, as well as underdogs like Myspace that are making a game attempt at one.

Yahoo and AOL have also seen their stocks rebound, rising 40 percent and 102 percent, respectively, in the past year. But it’s still too early to declare them successful turnarounds. Much of their stock gains have more to do with cash payouts to investors: AOL’s cash came from selling patents to Microsoft, Yahoo from selling half its stake in Alibaba.

Yahoo and AOL have yet to show the consistent, strong growth that marks a long-term turnaround. AOL may have posted its first quarter of growth in eight years, but it’s expected to grow by 3 percent a year, below industry leaders like Google. Yahoo, meanwhile, may have had stronger-than-expected earnings last quarter, but its CEO cautioned that a turnaround would be a “multi-year march.”

Still others, like MySpace, Digg, and Groupon, are in even earlier stages of their turnarounds and have to overcome skepticism that they will ever be able to return to something approximating their fleeting glory days.

So Priceline and eBay remain the only two clear examples of Web turnarounds we have. Priceline’s comeback is more dramatic if measured by its stock price. In 1999, the company’s stock peaked at $165 a share and then fell as low as $1 a share 18 months later. Priceline’s name-your-own-price business model was hailed, first, as revolutionary, and later as a flash in the pan.

In 2002, Jeffery Boyd, a veteran of Oxford Health Plans, became CEO and began taking bold steps, such as a 1-for-6 reverse stock split and shuttering name-your-own-price businesses for cars and phone service. The most significant moves Boyd made were to buy Active Hotels and Booking.com, solidifying Priceline’s presence in Europe and making investments that would produce handsome returns in coming years.

Since then, Priceline has quietly risen from $18 a share in October 2005 to $689 today, a 37-fold increase. Measured in pre-stock-split terms, Priceline is at $114 a share, still below its dot-com peak of $165 but – unlike in 1999 – trading at a sane 18 times its estimated earnings for this year.

Ebay’s stock never reached the manic highs of many startups in the dot-com days. In March 2000, eBay reached $32 a share (or $255 a share adjusted for stock splits since then). The stock fared better in the wake of the Internet bust, rising to $59 a share in late 2004, thanks to the wild, early popularity of its auction-driven e-commerce.

By 2009, eBay’s stock had fallen to $10 a share, reeling from a recession that should have brought penny-pinching consumers to the bargains on its site. That was also when eBay was in the midst of its turnaround, with CEO John Donahoe retooling the site away from auctions of used stuff anyone could sell to fixed-price, Buy-It-Now sales from the site’s most reliable sellers.

Donahoe oversaw redesign after redesign of the e-commerce site while slowly building up PayPal as a core part of the company. Payments have increased from 24 percent of revenue in 2006 to 43 percent last year. eBay also pushed its businesses onto mobile apps early on. Today, the bulk of growth in eBay’s e-commerce and PayPal’s payments are coming from mobile users. The results of all these moves are being reflected in its stock performance. eBay has traded above $57 in recent weeks, just below its 2004 high.

Having only two examples of Web turnarounds is an unrealistically small sample set, but both companies do share some common elements worth noting. The first is that both eBay and Priceline made a risky, fundamental shift away from an early business model seen as so revolutionary that it would change how retail works. Priceline still offers name-your-own-price deals and eBay still has auctions, but both are more on the fringe of the core business.

The second common element is that both Priceline and eBay made shrewd acquisitions, either in the earliest stage of the turnaround or before it. In hindsight, PayPal and Booking.com are two of the smartest deals made in the history of the Web. Both of the acquired companies helped determine the future courses their parents would take to return to growth.

The third is both companies addressed Wall Street clearly about its plans for a turnaround, but as far as consumers were concerned, the changes were happening quietly and over time behind the scenes. Priceline strengthened its brand with memorable ad campaigns, while the site’s evolution toward a more traditional travel agent was less visible. Shoppers who had drifted from eBay’s site have returned recently to find the search engine much improved, the sellers highly rated and the prices competitive with Amazon.

The last element a is quiet determination to adhere to a vision in the face of skepticism and several years worth of lingering doubts over whether a turnaround was taking root or whether a short-term setback was evidence that things weren’t working. In the case of eBay, the company held firm even in the face of complaints by some sellers who relied the site for their own business.

So for any executives of Web companies facing their own turnarounds, this is as close to a cheat sheet as recent history will offer: Back away from what isn’t working, even if it’s what you’re best known for. (Listen up, Yahoo and AOL.) Buy a smart company that can pull you into a better direction. And if you manage to buy one– don’t let the heft of your dysfunction destroy it. Talk to investors but don’t make your turnaround part of your consumer brand. And stick with your gut no matter what anyone says.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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