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In front of a nervous audience of Yahoo employees at its Sunnyvale headquarters last week, AOL head Tim Armstrong tried his best to be enthusiastic and positive.
"We have to decide what hills we are taking as the high ground," said Armstrong, using a very old military reference (no drone warfare allowed!), according to many in attendance, after a question about the strategic direction of the Silicon Valley internet company.
It was a nice though very nonspecific metaphor. Largely designed to calm the troops ahead of the more onerous task of figuring out how the new structure of combined companies will look, it said everything and absolutely nothing at the same time.
Armstrong is well known for being good at that — I am saying this as a compliment, Tim! — and showed off that skill when he appeared at Yahoo with his boss, Verizon’s Marni Walden. Yahoos in attendance said she projected what one person described as "Olympic-level confidence."
That’ll surely be needed at Yahoo over the next six months as the $4.8 billion deal to buy it wends its way to completion by early next year.
I spoke to a dozen people who were at the event and all said they were reassured by the meeting, but that it seemed clear that the integration to come would be tougher than was portrayed. "It will definitely be thorny," said one person, in what was a common refrain. "No matter how smooth Armstrong and Walden are — and they are very smooth."
Those in attendance at the FYI said CEO Marissa Mayer, who hosted and appeared onstage, largely got out of the way as the pair answered questions about their takeover of the troubled Silicon Valley internet giant. Along with the event, top Yahoo execs, Walden and Armstrong among them, ate in Yahoo’s URL’s, its main cafeteria.
The questions asked of Armstrong and Walden by Yahoos at the session were not much of a surprise, including about future strategies, what would happen to various units like email and search and, perhaps top of mind, when would the layoffs begin.
Or, using nicer terms, what did Armstrong mean when he talked about "synergies," often a code word for letting go of employees in areas where there is overlap. And between Yahoo and AOL there is lots and lots of overlap.
Armstrong had already addressed this in an interview with Recode right after the deal was announced, maintaining that nothing has been decided as yet. "The deal that we contemplated is about growing the company and did not start with synergies," he said. "We will be walking through a pretty direct process about what is structure and then cost structure and there will be synergy, but it is not at the top of our list."
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Armstrong, said those in attendance, repeated pretty much the same thing at the FYI, also noting that the decision of which units to keep and which will be cut has not been made, either.
That’s also an issue that has yet to be sorted out at AOL, which is still struggling to be integrated after it was acquired by the telecom giant for $4.4 billion a year ago. Rumors rocketed at the company right after the Yahoo deal that AOL itself was not meeting projections for revenue set right after that deal was struck.
Several sources said the delta between projected and actual revenue was above $500 million. But other sources noted that the budget got more complex with less-than-expected results from Verizon’s Go90 video service and the pulling of some video inventory, as well as the addition of other parts of the media unit that AOL is part of into the mix.
Still, it’s not the home run that is always projected when these deals are struck, and not meeting expectations is common to most deals. To deal with the situation, sources said, Armstrong has clamped down on the budget and had considered layoffs of up to 100. But that has been put off after revenue improved recently, although it is not a certainty that there might not be these kinds of more drastic cost cuts later.
And that will be a certainty if more unexpected costs at Yahoo are discovered. Already, Verizon has to manage possibly higher costs if a Yahoo search deal with Mozilla goes sideways. More immediately worrisome are pricey employee retention plans that Mayer has put into place over the last year in order to keep talent at the company as its fortunes continued to wane.
According to sources, those costs are enormous and closely linked to what some consider excessive stock compensation grants given to top execs. Sources said that under newish change-of-control rules, members of Mayer’s executive staff — such as CFO Ken Goldman and SVP Adam Cahan — will be allowed to fully vest their four-year stock option grants if they are fired within 18 months of the deal.
You read that right: Fully. Vest.
More reasonably, VPs at Yahoo — and there are lots of those — get 12 months of future vesting if they are fired within one year of the deal; other employees get six months of stock options accelerated with the same time frame.
"It is a terrible plan for AOL, because it encourages top executives to find a way to get fired," said one person familiar with Yahoo’s human resources systems. "They can smile and be gracious, but not care or do any work."
AOL and Verizon execs seem aware of this dicey issue. "Retention comp is important, but that money is less important than real commitment to make this work," said one person. "The biggest issue we are going to have is buy-in from talent."
This article originally appeared on Recode.net.
