Disclosure: I am long Yahoo.
We are two years into a rebuilding process under Yahoo CEO Marissa Mayer. It would have been a struggle for any new CEO coming in, after the core business had been neglected for 6 years prior. Nevertheless, the rebuild isn’t going great. The results of last week’s earnings call displayed that pretty clearly.
At its current market capitalization, Wall Street is valuing Yahoo’s core business not just at zero but actually negative $4 billion according to my analysis.
There are reasons for this, which I will explain. But the bottom line is that Yahoo is valued so low today on a sum-of-the-parts basis, with such an intriguing set of assets – most especially the relationships with Jack Ma of Alibaba and Masa Son of SoftBank through Yahoo’s Asian investments – that it makes it a compelling buyout target at these levels for the likes of Facebook, Apple, Microsoft, or even Google.
First of all, let’s look at what Yahoo’s worth today:
- As of Friday, all of Yahoo was valued at $33.5 billion.
- At the end of Q2, Yahoo had $4.3 billion of cash.
- It owns a $5.7 billion stake in Yahoo Japan (on an after tax basis).
- It owns 23-24% of Alibaba.
- On Friday, Leslie Picker of Bloomberg tweeted that the average consensus among analysts is that Alibaba will be valued at $154 billion when it IPOs and will subsequently trade up to $198 billion once it starts to trade post-IPO.
- Yahoo will sell 140 million shares in the IPO – or about 6% of Alibaba.
- At a $154 billion valuation, Yahoo will net $6.15 billion in cash (after taxes).
- Then, Yahoo will retain ownership of about 16% of Alibaba, which, at $198 billion, will be worth about $22 billion after taxes
- Add the cash and stakes up and you get a grand total of $37.8 billion.
- Therefore, the market is valuing Yahoo’s core business at negative $4 billion – or the market doesn’t believe Alibaba will be worth that much at and after IPO, or it isn’t valuing Yahoo’s cash at a dollar for a dollar because it worries that Mayer will waste the cash on dumb acquisitions.
What is Yahoo’s core business worth?
Let’s be clear, it has ample problems. Growth has been flat for years. Their display business is struggling.
Yet, in the last 4 quarters, the core business generated almost $1.5 billion in EBITDA. Most Internet companies are valued at an 11x EBITDA multiple or higher. If we put a 6 multiple on Yahoo, you get to a $9 billion for Yahoo’s core business.
AOL has $434 million worth of EBITDA annually and gets a market cap of $3 billion. That’s closer to a 7x multiple. And, don’t forget that all of AOL’s EBITDA comes from its dial-up business, which is on a slow march to oblivion. It still makes no money from its Brands division with HuffPo or is Programmatic ad buying division. And AOL’s not really growing – just like Yahoo.
I’m not making the argument that Yahoo’s got as strong a business as Facebook. I’m just saying it should at least be worth as much as AOL.
So, if you grant me the core business is worth $9 billion, and the investment stakes are worth the values laid out above, and you believe a dollar of cash is worth a dollar of cash, that gives you a grand total of $46.8 billion. That’s about $46.80/share.
Now, Yahoo also said last week it would use at least half of its Alibaba IPO stake sale proceeds (or at least $3 billion after taxes) for stock buybacks. So you can probably up that $46/share “fair value” estimate slightly.
So, the people who hate Yahoo – and remember everyone hated Yahoo in 2011 at $11, except Dan Loeb and I – make the fair points that:
- You have to give a holding company discount to Yahoo because they’ll never do anything with these investments and;
- Marissa will waste all the cash on non-accretive M&A
They also like to make disparaging comments about the company that it’s a dinosaur, etc. They’ve said the same thing since it was an $11 stock. Now it’s a $33 stock. I don’t care about these opinions. I care about whether there’s an opportunity to make some money here.
And I do think there’s a fantastic opportunity for a strategic buyer to make some money now buying Yahoo. Specifically, I think that Apple, Facebook, Microsoft, and Google should also be looking closely at it.
There are three reasons these companies should be looking at buying Yahoo right now:
- Anyone who buys Yahoo now will get their Asian stakes in Alibaba and Yahoo Japan (which is partly owned by SoftBank). Alibaba and SoftBank are going to be among the top 10 (if not top 5) global Internet players in the next 10 years. By acquiring these stakes and likely selling them back to these two companies, a Yahoo buyer will likely develop a close partnership with both firms – just as they both aim to make major expansion efforts into the US and around the world. They can also be helpful to a Yahoo buyer who is interested in making a stronger push into both China and Japan. Make no mistake, this should be the biggest attraction for a strategic buyer looking at this deal, not Yahoo’s core business.
- Alibaba is going to make a big push into the US (it’s already here with its 11 Main site) and it likely has Amazon and Jeff Bezos in its cross-hairs. SoftBank wants to buy Sprint and just hired Google’s Nikesh Arora to run its US Internet business. An enemy of my enemy is a friend of mine. Any of the four US internet companies I mentioned above likely want to greatly expand their e-commerce efforts rather than ceding more ground to Bezos. It would be invaluable to have a close relationship with Alibaba to do this.
- You would get Yahoo’s core business for “free.” Of course, that’s at current levels. To do a bear hug offer on the company and get it accepted, you’d likely have to pay a premium. However, it’s so discounted now that, even tacking on a premium, you could still get it for nothing after you sold back the Alibaba stake to Jack Ma and the Yahoo Japan stake to YJ/SoftBank so they could retire their shares and greatly increase the value of their stocks. Yahoo’s core business isn’t perfect, but it does have 800 million web users and close to 500 million mobile users. If you added Yahoo’s EBITDA to Facebook’s from last year, Facebook’s EBITDA would increase by 33%. Is that worth more than “free”? Of course.
Now, why would each of these potential buyers want to do this deal?
Facebook:
- They remain shut out of China. Could Jack Ma help the company enter the market?
- Facebook wants to make a bigger push into e-commerce.
- They’d like to see that the Amazon phone fails to gain traction.
- If they can reap any new members/engagement from Yahoo’s 800 million members, so much the better.
- Increasing their EBITDA by 33% would be great if it supported the stock, which in turns makes their employees happier.
Apple:
- Web services have been a hole for Apple forever. Some slimmed down version of Yahoo could form a new in-house web services group for Apple.
- Apple wants to be a player in payments but could they partner with a big e-commerce player to help roll this out?
- Beating back Jeff Bezos? Sounds great.
- Can Alibaba help Apple push more strongly within China? Can SoftBank help in Japan?
Microsoft:
- New CEO Satya Nadella has said that he’s not selling their Online Services Division or Bing. If that’s the case, how do you make both assets bigger/more relevant? Yahoo’s not a silver bullet but it’s part of an answer to that question.
- Do they need to partner with someone helpful in China? Would they like to see Bing get some increased market share in China from a partner who doesn’t want to see either Baidu or Qihoo 360 succeed?
- If Alibaba and SoftBank are going to make big pushes into the US and internationally, how can they pull along Microsoft’s OSD to be more relevant?
- Last time, Microsoft tried to buy Yahoo for $45 billion. Now, after selling the stakes back, they could buy it for nothing. Nadella could sell that internally and externally as a great deal, even before considering the partnerships with Alibaba and SoftBank.
Google:
- Google of course tried to buy or partner with Yahoo in the wake of the failed Microsoft bid in 2008 but was denied by the Justice Department. Nikesh Arora then did a mobile ad partnership with Yahoo later. The attraction for Google has always been the potential for monetizing all those page views that Yahoo has. Of course, potential antitrust concerns might come up again here making Google, in my view, the least likely buyer of Yahoo.
- Google has officially left the Chinese Mainland. Could/would they re-enter? Perhaps Alibaba could help. All of these big US Internet companies need a Chinese strategy.
The bottom line is that, for any of these buyers, the time to act to buy Yahoo or make a compelling offer that Yahoo, with no controlling or dominant shareholder, would have a hard time resisting (especially after what happened in 2008). And now is the time to act: before Marissa Mayer can spend any of the incoming Alibaba on acquisitions which the buyers themselves might not make.
Of course, Mayer herself might welcome being bought out. This turnaround is tough. It would have been tough for anyone. She is nowhere near done. But any big buyout would make her look like a hero and she wouldn’t have to toil over the revamp of the fumbling ad group and other messy stuff. She could move on to what’s next for her: either as part of the acquirer (like Apple) or to her next chapter.
Yahoo isn’t a perfect company. But it has a collection of assets and relationships at such a compelling value that will prove too tempting for any of these big US companies to pass up.
