Betfair faces a tricky leadership dilemma. Its CEO David Yu has taken the blame for its poor financial performance since its public launch last year. Will a change of leader address the problems which the company faces?
Background to Betfair launch and LMAX
Shareholders are understood to have expressed their dismay at the leadership of the company after a gruelling nine months that have seen shares floated at £13 last October  hit a recent £7.16 low [June 2011]
American CEO David Yu was Betfair’s chief technology officer before becoming chief executive in early 2007. The floatation required his technological skills in dealing with a financial innovation (LMAX) at the heart of its business model. This was explained at the launch of LMAX [October 2010].
Betfair, the world’s leading sports betting exchange, established LMAX and is the majority shareholder in the platform. Betfair changed the sports betting market by allowing its customers to trade against each other and invented the first truly successful exchange model for sports betting. The LMAX exchange solution, which has been developed over several years of rigorous research and development, is based on Betfair’s original matching engine but has applied and refined this model for financial trading, alongside proprietary and scalable in-house technology.
David Yu resigns
A further analysis from the Telegraph outlines the backround to Mr YU’s resignation
Brought to market by Goldman Sachs, Morgan Stanley, Barclays Capital and Numis Securities, Betfair has struggled to grow revenues and been hit by a range of regulatory problems, executive departures and the poor performance of its start-up LMAX financial exchange. In a recent note, Vaughan Lewis, a Morgan Stanley analyst, said: “Betfair has faced what we see as a perfect storm since listing.” He highlighted “adverse regulatory changes”, including an attempt by Italy to revoke Betfair’s licence and a draconian approach from Germany.
Having seen quarterly sales growth of 22pc at the time of the float, Betfair had also “effectively stopped growing”, while losing market share to rivals such as William Hill and Paddy Power. The leading internal candidate to replace Mr Yu is thought to be finance director Stephen Morana.
The Leadership Dilemma
Mr Yu’s resignation may be an opportunity for the company to introduce change alongside the appointment of a new leader. The difficulties may well be associated with the leadership of Mr Yu, but the core of the business model relied on his technical knowhow. The corporate ad campaign was memorable as a way of betting by cutting out the middleman and ‘betting fair’ between individuals (with a no-risk fee to Betfair, who is somehow represented as not being a middle man).
But will an internal candidate will be able to suggest a way out of the wider set of problems including those euphemistically labelled as “adverse regulatory changes” by Morgan Stanley? Will a radical new business model convince investors to stay the course?
On Wednesday afternoon [JUne 29th 2011] its shares were up 0.2% after Betfair also announced that it would now return money to shareholders by buying £50m worth of its stock. Betfair’s betting exchange model allows its customers to bet against each other, bypassing the need for a bookmaker.
Mr Yu said: “The past 12 months have seen significant change at Betfair as the business continued to grow and made the transition to being a public company. “A huge amount has been achieved during the period, and I’m delighted that we have more customers than ever resulting in a record number of bets placed and that we’ve reported record revenue and profitability. Despite these successes, revenue growth… could have been stronger but we have delivered a significant improvement in margin resulting in profitability for the year above expectations.”
Mr Yu said on Monday that he would not renew his contract when it expired in October 2012, but he is expected to leave the company before that date.