Yahoo! Inc.; Market Cap (as of 03/10/2014): $40.28bn
Yahoo!, the American multinational corporation, is at a turning point of its existence: being the second largest shareholder in the e-commerce company Alibaba, it was to forced to sell 27% of its stake after the Chinese giant went public on September 19 in New York, thus finding $6bn of fresh cash in its balance sheet. CEO Marissa Mayer has already planned to return $3bn to shareholders, yet after this operation there will still be $7bn ($3bn from the shares’ sale and $4bn already present in the books) to deal with. So the question is, what to do with all this money?
Among the possibilities for Yahoo to perk up its future growth perspectives M&A operations are maybe the most appealing; in particular, there has been a long standing rumour that the US Internet company would use its little treasure to merge with AOL. The merger with the American mass media corporation with a market cap of $3.5bn was proposed by the activist investor Starboard Value in order to reduce the tax bill on the Alibaba stake and achieve significant synergies in order to reduce the gap with competitors such as Google and Facebook. Moreover, AOL has invested heavily in programmatic ads to increase advertising revenues; while Yahoo has struggled to keep up with new advertising trends. However, there are still some doubts about the deal: it seems that the mass media company does not offer enough grow potential while companies’ management may not be so keen to leave the helm.
Another possible target company is Yelp, an American multinational corporation with a market cap of $5.5bn, which owns a mobile platform used to rate local bars and restaurants. Given the high growth profile of the company and Mayer’s target to focus on everyday mobile engagement a merger with Yelp seems particularly appealing. Nevertheless, the average estimated price for Yelp is around $8bn, well beyond Yahoo’s current financial resources while the lock up restriction period does not allow Yahoo to dispose of further Alibaba shares in order to retrieve additional resources.
On the other end of the deal-making spectrum, Yahoo could play the part of the target putting itself up for sale to other firms in order to dispose of the stake in Alibaba in a cost-effective manner; in fact the simple sale for cash would trigger an expensive tax bill due to the 35% corporate tax rate. Although Yahoo, as a possible acquisition would not make sense for many firms, due to low growth and stagnating client base, it could however make a whole lot of sense for a select few, most notably for Alibaba and for Softbank.
The simplest situation would be one in which Alibaba would simply buy out the entirety of Yahoo. In this case, Alibaba would be conducting a quasi share buyback. To finance this deal it could offer 384m shares (worth $33.8bn) and cash ($7bn + premium). What precisely makes this interesting is that Yahoo currently possesses 384m shares in Alibaba and $7bn in cash: the net result to Alibaba would be to acquire Yahoo for a very convenient price, even including a premium over the current market price of Yahoo ($40.8bn; as of 03/10/2014).
Among the numerous upsides to this strategy the possibility for Alibaba to directly retire its own shares without passing through the market place is the most relevant together with the exposure towards the US market that the Chinese company would immediately gain. However, the road for this solution is full of hurdles, concerning both management issues – no one likes to sell its company almost “for free”, and clear national interests.
Another possible move would be a situation in which Alibaba acts as the intermediary for the purchase of the core Yahoo business by another firm. Indeed, Alibaba would buy Yahoo and after having done so would spin off Yahoo minus the shares into a separate entity for sale to a third party. This would be great for all parties involved: Alibaba would be able to retire the shares at no cost to itself and the management would not have to run Yahoo. Yahoo would be worth something and be rewarded by the money paid by the third party. Meanwhile the third party would not have to worry about offloading the Alibaba shares at a discount due to taxes.
There is however one flaw in this strategy: who is this third party? With Yahoo trading below or close to just the sum of its parts, it’s clear the market does not see much value in Yahoo’s operations.
Lastly, there is one more possible strategy that Yahoo could implement, pairing the Alibaba shares with a minor business and spinning it off as its own company. The shares of this new company would act as a proxy to common Alibaba shares, due to the value of the Alibaba stake heavily eclipsing that of the attached business. However, because Alibaba shares would still be gross of taxes for any possible acquirer, the proxy shares would trade at a discount thus allowing Alibaba to acquire the proxy business in the future and implement a cost-effective share buyback without the complication of running Yahoo’s core business or of finding a suitable buyer. The only real issue here is that of regulation: the spin-off would need a justifiable business reason and, despite being based outside US, the subsequent purchase by Alibaba would be heavily scrutinized by tax officials.
The other possible bidder for Yahoo according to Eric Jackson, founder of Ironfire Capital, could be SoftBank. Nevertheless, there is much less to say and justify in this case apart from the fact that SoftBank would control almost a 50% stake in Alibaba and, like Alibaba, it would have not to pay a 35% tax as it wouldn’t be seeking to sell the shares.
In conclusion, Ms. Mayer has now the burden of deciding the years to come of a declining tech giant whose shareholders repeatedly demanded for returns. Opting for one of the three possible acquisitions explained in the first part of the article the CEO has to take a heavy bet on the future putting its reputation at stake, while opting for the “prey” role shown in the second part would represent a defeat for the former Google manager. Perhaps, the solution lies in taking time and waiting for further opportunities to come, an option often ignored by market players, even if this implies holding back impatient shareholders.
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