Yahoo! Inc. market cap as of 22/04/2016: $35.15bn
Yahoo! Inc. is an American multinational technology company founded in 1994 and headquartered in Sunnyvale, California. It is well known for its Web portal, search engine Yahoo! Search and related services. Its global network counts over 3bn views per day, making it the 3rd most visited website in the US. In September 1997, thanks to the $1.4mn purchase of the web search engine company Net Control, Yahoo started growing externally. The company has been investing a lot on acquisitions with respect to its peers, at the point that net spending on M&A as a percentage of market value reaches 52.6%, a value 4x larger than Microsoft’s and 13x Alphabet’s while the global 20 years average is 6.9%. As of today, Yahoo has acquired over 122 companies for a total of $17bn and divested about $1bn. However, most of these deals came out to be failures: an example could be the $5.7bn purchase of internet radio Broadcast.com right before the dot com bubble burst. After 20 years and $16bn net spending in acquisitions, Yahoo’s core business is being valued between $5bn and $7bn, having therefore, in the end, effectively destroyed more than $10bn of value.
From a financial point of view, Yahoo’s net income has fallen from $3.95bn in 2012, to -$4.36bn as of FY2015 and, in the last four years, EPS has dropped by 162%. Having both net income and EBITDA negative, a multiple analysis proves quite ineffective. A significant ratio is the EV/Sales, with a value of 5.1x, highlighting a similarity with companies that seem to be facing some difficulties like Microsoft and Twitter (respectively 4.2 and 4.5) and an emphasizing discrepancy with Alphabet (20.2) that, on the other hand, is still growing steadily.
Ironically, both Yahoo’s minority investments and cash & short-term investments are valued more than the core business. In fact, Yahoo currently owns a 15% stake in Alibaba (as of 2012, Yahoo had a 40% stake in Alibaba, but sold back half of it for $7.6bn) valued at $28bn and a 34.75% stake in the growing joint venture Yahoo Japan, worth around $9bn. As of FY2015, the company also accounts for approximately $6bn in cash and short-term investments.
2012 and the new CEO Marissa Mayer
2012 has been a turnaround year at Yahoo: on 17th July the company appointed Marissa Mayer as President, Chief Executive Officer and Member of the Board of Directors. The new CEO announcement meant for the company a renewed focus on product innovation, in order to drive user experience and advertising revenue for one of the world’s largest consumer internet brands. Mrs. Mayer was responsible for Local, Maps, and Location Services for Google, which joined in 1999.
Well-known visionary leader in user experience and product design, she was expected to become the fifth chief executive in four years to step up to the challenge of turning around the struggling web portal. The company resulted to be extremely weak given the disorder at the top of the company, its low valuation and its failure to launch ground-breaking products. Therefore, it was easy to conclude that Yahoo should be run for cash. That’s why the presence of the CEO Mayer met the needs to find a product expert who could make Yahoo more relevant for today’s Internet users. In fact, according to her, we are dealing with a company with an amazing following, terrific brand and huge amount of potential: its only need was to be developed.
Mayer faced an almost impossible task: restoring Yahoo’s ability to innovate, repairing its image with advertisers and customers, and injecting some energy into the depleted work force. Immediately after this turnaround, welcomed by Wall Street with a stock rise of 2%, the strategy was focused on new ways of advertising and on growing revenues. As a result, Yahoo and Facebook announced definitive agreements that launched a new advertising partnership. Yahoo also launched Axis, a new experience that re-imagines how consumers search and browse on the web, and Genome, an online advertising solution. Yahoo lastly announced a strategic content, programming and distribution alliance with CNBC that would have provided a broadcast platform for Yahoo! Finance, and a cross-platform content distribution and promotion agreement with Clear Channel and Spotify.
Currently the CEO Mayer, who is now in her fourth year of mandate, counts on selling $27.7 billion stake in Alibaba Group Holding Ltd as a centrepiece to her strategy to unlock value for shareholders. However, Yahoo intentions are extremely uncertain and it seems that the company will shelve its yearlong plan in favour of the so-called Internet business reverse spin off, that would turn the Web assets into a separate, publicly traded company. Comparing these two opportunities it is clear that selling the core business would incur in a lower taxes bill than the huge Alibaba deal.
Potential Buyers and Shareholders Opportunities
At the moment, there is a lot of activism from the shareholders side given the weak performances of Yahoo during the last years. In particular, Starboard, a significant shareholder, declared on a letter in January 2016 that the actions pursued by the Management and the Board of Directors during the last years are not in line with Yahoo’s goals. The situation between the firm and the shareholders is now very complex given the desperate need to create value looking for an exit solution that could be a new restructuring plan, a spin-off or the sale to willing buyers. Even though the Management have put a lot of efforts in trying to restructuring the business, the operating performances are still below markets and shareholders expectations and are getting worse quarter by quarter. Moreover, the company is gradually loosing top executives leaving Yahoo as a result of the declining performances.
Another point that has been discussed a lot is what to do with Alibaba’s 15% stake. Yahoo is still considering a spin-off even if there is a lot of concern on if the spin-off will be a tax free transaction or not.
Even if since 2012 the company has been suffering huge slowdown in revenues and profits, there are still many tech giant companies interested in Yahoo’s core business. Microsoft, Daily Mail and Soft Bank are interested in bidding for the company but on the other hand also Private Equity firms such as TPG, General Atlantic and KKR have shown interest in a potential acquisition. However, there is still a debate within private equity firms on how to create value from the acquisition of Yahoo since it seems to be a tough task. After all, the realistically most important bidder for Yahoo seems to be Verizon that after the $4.4bn AOL acquisition is looking for strategic takeovers in order to grow massively and facilitate the shift of video content to mobile devices and serve up advertisements on these platforms.
Speaking about the price, people familiar with the topic predicted that a good result could have been achieved in terms of price only if the entire entity was sold instead of selling businesses as a result of spin-offs. In order to better understand the big picture, a mention must be made about the Microsoft’s $45bn bid for Yahoo (with an implied premium of 62%) made a decade ago and turned down by Yahoo itself. The Microsoft’s bid was significantly higher than the current market capitalization and it is well shared the opinion that Yahoo made a huge mistake in turning down the deal. Analysts agree on a valuation for the Yahoo’s core business of 5x Adjusted EBITDA ($750mn) of almost $4bn (referring to the core business we are obviously excluding from the valuation real estate, $7.1bn of cash on hand, intellectual property and all Asian assets). Then adding the premium for the shareholders the final estimate for the core business is on the range of $5bn to $7bn. A hypothetical valuation of over $8bn, initially predicted by some shareholders, seems to be quite unrealistic.
In case of a sale, the company will still exist and it will have to deal with Alibaba stake and Yahoo Japanese assets. The main challenge for the new entity will be the minimization of the taxation combined with the investment of the cash inflow coming from the sale.
BSIC’s view is that the company is clearly facing difficulties in keeping the business profitable and the tensions with the shareholders base are making the situation even worse. The Management together with the Board of Directors must be able to reach a final decision on the topic as soon as possible in order to unlock value for shareholders and keep the business on track for future growth. According to the directors the core business sale isn’t the most likely outcome (even if Verizon seems to be pretty interested in the takeover) because they feel the asset is undervalued by the market, even if it will result in an immediate liquidity inflow. However, it would give Ms. Mayer time to cut costs and focus on a completely new strategy.