The Problem With Yahoo!'s Layoffs

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Yahoo! (NAS: YHOO) finally made it official. It will be letting go of 2,000 employees -- or 14% of its workforce -- in a move that the market is initially applauding.

"It was probably warranted and overdue," S&P Capital IQ's Scott Kessler writes this morning, reiterating his bullish rating on the stock.

Others would seem to agree, judging by Yahoo!'s weak margins and revenue per employee relative to dot-com darling Google (NAS: GOOG) .


Yahoo! hopes the move will make it "smaller, nimbler, more profitable," but hasn't that been the company's problem all along?

Yahoo! believes that issuing the pink slips will save the company $375 million a year. At least one money manager sees another layoff wave coming. If Yahoo! can do more with less, great. Even a sympathetic observer can agree that many companies have more employees than they need. However, how is Yahoo! going to foster an environment that encourages innovation when morale is simply waiting for the ax to fall again?

If a Yahoo! employee has a brilliant idea that can make the Internet giant a lot of money -- but fears getting fired -- that idea is going to get tucked away and used elsewhere.

These layoffs are a lot like the move to outsource its search through Microsoft's (NAS: MSFT) Bing. It seemed like a good idea at the time. Yahoo! gets to scale back its operations, focus on other areas, and cash in on the savings. Yahoo!'s bottom line improved, but its prospects -- and more importantly, its relevance -- went the other way.

Yahoo! has resorted to several layoffs in recent years. What does it have to show for it? The stock is still in teens, and activist investors are still rattling the proxy cages.

Not every layoff is a bad idea, but what Yahoo! needs now -- more than ever -- is a hit. With thousands of fewer heads around to dream up the killer catalyst and those still around rightfully fearful of dreaming out loud, these workforce retreats are rarely the prelude to big steps forward.

Start bleeding purple
Yahoo! may or may not be looking to cash out of its Asian assets as another way to raise some dough. There are three American companies set on dominating the world. Yahoo!, as you can imagine, isn't one of them. It's a free report, and it's yours now.

At the time this article was published The Motley Fool owns shares of Google, Yahoo!, and Microsoft. Motley Fool newsletter services have recommended buying shares of Yahoo!, Microsoft, and Google, as well as creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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