Red Herring seems to always go out on a limb on its articles. (I guess if only a few hundred people read it, its not so bad if you look foolish) This time, its talking about some Manhattan based PE shops partnering up with either Silver Lake /Francisco/TPG to take on the some mega tech companies . . .

“Size is not an issue. If the public markets are not going to value these companies, then private equity will,” said the source, who spoke on the condition of anonymity.

Private equity investors are increasingly attracted to maturing tech companies because they have stable earnings, strong cash flow, and little or no debt—meaning they can afford to take on debt in a buyout.

The most interesting (if not outlandish one) is the Yahoo rumor:

Yahoo is another ailing giant that has attracted private equity attention, despite its $38-billion market cap. While still the most popular Internet destination, the company’s media strategy has floundered and its search technology has fallen behind that of rival Google, which can provide more relevant results and charge higher advertising rates as a result. Yahoo shares have fallen 36 percent from their 52-week high this year, but private equity groups remain wary of taking on a company they are not sure they can turn around.

Especially given the “Peanut Butter Manifesto“, this idea is actually not so remote. First of all, I think the probability of this happening is less than 5%. But its interesting exercise none the less to think about how to get this done. Putting on my banker/buy out hat on for a sec. I would not even try to “restructure” Yahoo in the operational sense . . . re-orgs that focuses on people creates too much uncertainty and financial types don’t really have the appetite for that kind of risks. Instead bankers like to fall back to sum of parts type of analysis . . . that’s right . . . break up the peanut butter empire into yummy little pieces. Yahoo is nothing but a badly managed conglomerate (think Tyco) this is what I would do (given 10 sec to think about this and not a lot of insight on financial performance or operational issues of each division)

1. Split the company into 4 broad groups - portal, media, applications, and search/advertising

2. “Yahoo the portal” should go back to its roots as an aggregator of best of breed applications, news, and information . . . it should act as an attention aggregator (like Google) but instead of search, focus on its ability to editorialize and filter out crap. As the grand daddy traffic switch on the internet it can extract placement fees (not dis-similar to adwords) to be listed or integrated. At the current incarnation, Yahoo has just way too much conflict of interest between its homepage group and its vertical groups - all fighting for a piece of traffic that Yahoo.com gets (why do you think Brad is such a central figure at yahoo? he owns the homepage). MyYahoo is an already successful implementation of this.

3. The media group should focus on content rather than distribution. . learn from lonelygirl15, G4 media, and focus on creating this generation of independent films -> half interactive TV, half character focused vignette, half commercial, half SNL, and half . . . porn

4. Search is the seed that supports an ad network with quality traffic and thus attracts advertisers (adsense + adword). Thus I would not separate the search and the advertising business (as Yahoo does today). By leaving the mother ship, the search team will be given free reign to expand on its syndication strategy even more so.

5. The application group will probably need to be split up more, but that’s a divestiture issue for these shops to juice immediate ROI (plus making Yahoo pay it “management fees”) . . . this group includes marketplaces (yahoo shopping), fantasy sports, IM , and all that good stuff that Brad considered “spread too thing” . . . these wonderful apps deserves to have more resources - people/money - to compete with singularly focused startup competitors. Even more important, they need to be freed from the handcuff that keeps them from going bare knuckle with sister properties - nothing like selective self-restraint to induce general paralysis.

6. Lastly, to keep the transition into independent groups from destroying short-term value. I would strike medium term non-exclusive deals (3 - 5 year) for traffic, advertising, and cross property integrations between all three groups so that survival is not an issue. Given the rise of web API’s - integration (which used to be a major value of having everyone under one roof) is no longer a hurdle that requires extensive technical coordination and platform synergies of being the same company.

Freed from the matrixed to the tilt structure of an overly managed organization, I think Yahoo as the magic bullet will have a chance to thrive once again.

Remember the lessens that Adam Smith tried to impart . . . let the invisible hand of market economics drive the ebbs and flows of interactions between companies and people. As complexities rise in any organization (or country) a centrally managed economy (isn’t that Yahoo with all its value transfer between groups?) is destined to fail.

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update. . . looks like Fred Wilson voices similar thoughts . . . that the “all under one roof” strategy needs some re-thinking. . . The De-Portalization of the Internet (aka What I Would Do If I Were Running Yahoo!)