April Payrolls and the Island Conceit
The April 2016 Non-Farm Payrolls reveal a significant slowdown in the pace of new hiring. In April our net addition of jobs was 48,000 short of March and 73,000 short of February 2016. February 2016 jobs gains were revised down by 12,000 jobs and February numbers were revised down by 7,000. Revisions disappeared an additional 19,000 jobs. We appear to be on the same downward trend in economic activity as the rest of the world. This is only surprising and unexpected because the island conceit persists.
The island conceit is the belief that the world economy and global conditions do not profoundly influence the economic lives and realities of Americans. Globalization, trade and international engagement are taking a political bruising; the island conceit seems to have made a visibility-reducing return to economic analysis. Commodity and raw materials exports have been writhing for well over a year. The IMF, World Bank and OECD have been guiding growth estimates down. China has slowed, Brexit looms and our Presidential primary process may not be calming and reassuring to all regarding our rationality and leadership? Maybe, just maybe, our interconnected economies, political processes and culture call into question the island conceit?
Most distressing in the recent jobs reports has been the stubbornly low labor force participation rate. Labor Force participation tells us how effectively we are attracting people to enter and stay in the official and mainstream economy. It is a measure of the folks that are employed – full or part time- and the folks who are unemployed but actively looking for work. This is a measure of the engaged and active population. One real and potent test of how well and widely opportunity is available is seen in participation rates. We are not an island, separate from the world and we don’t want to have subterranean layers and levels of the economy.
We have had monetary policy accommodation, easy money, for nearly 8 years. We have struggled to emerge, globally and domestically, from a long and deep decline. Every report of economic weakness is seen, by some, as cause for rejoice about prolonging easy money. This continues despite global economy news and a near universal belief that easy money is not very potent any longer. We should be looking more closely at global economic conditions and building a broader employment and tax base. We have an opportunity now to embrace new options and realities and move off of seeing ourselves as an island. Likewise, we might be better served by paying more and explicit attention to the islands of folks left behind in our and global markets?
And the Winner is…?
Yahoo core is on the block. CEO Marissa Mayer reconfirmed it and the board with four new directors at the behest of activist investor Starboard Capital made sure the decision is irreversible. Accordingly, the first round of bidding process has closed and the company expects to conclude the auction process by June, as per media reports.
At stake is Yahoo’s advertising technology, mobile reach, and wide user base.
Companies with a rich trove of data and looking for ways to monetize it effectively will be hard pressed to pass on this compelling opportunity to enhance their capabilities. The bids, according to WSJ, have ranged between $4 and $8 billion, or 5 and 10 times Yahoo’s EBITDA of roughly $800 million.
The front runners for this coveted prize are a broad mix of companies. According to Reuters, Verizon is set to advance to the second stage from a pool that includes major PE firms (TPG, Bain Capital, Apollo Global, Apax Partners, and Warburg Pincus), Yello Pages owner YP Holdings (reportedly backed by AT&T), and the U.K. publisher Daily Mail.
Handicapping the ultimate winner is always difficult, more so in this case. A number of factors however favor Verizon to walk away with the prize. For one, Verizon has already telegraphed its intention to buildout its mobile video platform. This is important for Verizon not only because consumers are increasingly drawn to it, advertisers are allocating an increasing share of their ad budgets to this growing medium, and competitors are moving head-on into this space. Most important, in the face of a saturated mobile market, Verizon, like other carriers, is looking for other ways to generate revenue growth. Booming video streaming market seems to be the next frontier. With that in mind, Verizon acquired AOL in June 2015 for $4.4 billion. By merging Yahoo with AOL, Verizon is poised to extract the most synergies – roughly $1 billion – based on Starwood’s assessment two years back.
Verizon CEO Lowell McAdam described the digital-media space as “hot” and has clearly prioritized the area as part of its continuing pivot into adtech platforms and video, both of which Yahoo could help with. Adding Yahoo would bring Verizon’s share of digital ad spend to 5.2% from its current 1.8% share, making it third behind Google and Facebook but still far behind. Verizon has increasingly been making use of the vast data available through its wireless customers, while its go90 streaming service could also benefit from the user boost gained through Yahoo’s various Finance, Sports, and email services.
Consolidation throughout the industry will likely be necessary given the number of smaller unprofitable firms and the major players that are currently cash-rich. Our view is that VZ-YHOO deal could have trickle- down effects in adtech, as smaller players have not found a friendly IPO market. Verizon might pursue additional smaller acquisitions, executing a roll-up strategy to scale up and improve its platform, and market share will provide greater pricing power. PE firms like TPG, Bain Capital and Vista Equity Partners have likewise tried to beef up holdings in the space, making up 9% of the acquisitions in Q1 2016 out of $2.4B total in the quarter.
Ultimately, failure to sell the core business would likely be the nail in the coffin for Meyer, who has been increasingly under fire for mismanaging Yahoo’s turnaround strategy.