Yahoo Downgraded at Jefferies

Jefferies & Co. downgraded its rating on shares of Yahoo Inc. (NASDAQ: YHOO) to hold from buy with a price target of $18, after the company announced the appointment of PayPal's President Scott Thompson as new chief executive officer and director effective Jan. 9.

Yahoo's appointment of Scott Thompson as its CEO is an indication that: board has decided to reinvigorate Yahoo by bringing a tech-oriented CEO to grow it again; a long, costly and risky endeavor, and proceeds from the Asian assets' monetization (if/when it happens) could be used for M&A/investments rather than returned to shareholders, said Youssef Squali, an analyst at Jefferies.

Squali said that while Scott is a strong leader, his lack of media/turnaround expertise are negatives. Scott is an impressive manager who proved at Paypal that he can successfully run a fast growing company.

That said, he's a technologist, who ascended to the CEO job at eBay's Paypal in 2008 after serving as its CTO in charge of information and product development. Before Paypal, he was at Inovant, a unit of Visa, as VP of Tech solutions, and prior to that he was at Barclays Global Investors as its CTO.

His appointment is somewhat puzzling to Squali given Yahoo's effort in the last few years to become more of media and content than a pure technology company.

Scott's appointment is indicative perhaps of a change of direction for Yahoo as it tries to return to the forefront of technology innovation, as Scott explained on the conference call. This is a costly challenge, especially when competing with Google Inc. and Facebook, said Squali.

Squali said Scott's background does not indicate a deep involvement selling online media on any scale, which while not rocket science, is very different from running an online payment processor. That said, improving user experience is a top priority for Yahoo and his experience should help in that regard.

Scott's background does not indicate much in way of turning around large brands. He's more of a builder of rapidly growing businesses than a turnaround executive, in Squali's view.

Sale of Asian assets still a possibility but Scott's appointment could indicate a more acquisitive Yahoo versus returning cash to shareholders. Board may still act swiftly and sell part of its Asian assets, but under a tech-focused CEO, cash from the sale could be used for M&A/investments instead of being returned to shareholders, said Squali.

Yahoo stock closed Wednesday's regular trading down 3.10 percent at $15.78 on the NASDAQ Stock Market, while in after-hours the stock moved up 0.32 percent.