Can Lightning Strike Twice For Yahoo?

| About: Yahoo! Inc. (YHOO)


Yahoo has made some great moves lately.

Apparently Yahoo is sizing up a company called News Distribution Network.

If Yahoo is able to buy the company, it could hugely benefit shareholders in the long run.

Recently, Yahoo (NASDAQ:YHOO) has been talking about acquiring a company called News Distribution Network [NDN]. Although the acquisition might just be hearsay, it's still worth paying attention to. If the acquisition goes through, NDN could fuel some serious growth for Yahoo.

What's going on?
Yahoo unsuccessfully attempted to acquire both Hulu and Dailymotion in 2013. During the Q4 2013 earnings call, CEO Marissa Mayer was adamant on video being a key component to Yahoo's growth. During the call she said, "We are focused on building our audience and our library."

The upcoming IPO of Alibaba will likely inject a lot of cash into Yahoo's books. What's a quick way to gain a video audience and library when you have boat-load of cash? Acquire a company with both! Hence, Yahoo's interest in NDN.

What's NDN?
News Distribution Network, Inc. is an online video property founded in 2007 by Grep Peters, a former AT&T (NYSE:T) executive. The company makes video clips available to editors at sites such as the New York Times, Bloomberg, and New York Daily News and sells advertisements that play before the video clips. NDN is the fourth largest video site, with 573 million views and has built a library of over 100,000 videos from various partners. The company is a small version of Google's (NASDAQ:GOOG), (NASDAQ:GOOGL) YouTube.

Will NDN be able to compete with YouTube?
Before we can decide if NDN will be able to compete with YouTube, let's compare the two companies.

YouTube: anyone can create a YouTube "channel," upload content, and get paid through "Google adsense" based on how many people click on the advertisements that run before their videos.

NDN: content gets uploaded from its 800 premium providers then is published by its 4,500 publisher sites. Similar to YouTube, content providers and publishers earn revenue based on how many people click on the advertisements.

NDN is a "premium" content exchange. The content is only provided by a select group of providers, so advertisers can be confident that their ads won't run before silly or offensive videos. With YouTube, virtually anyone can provide content. NDN brands itself as an efficient solution for newspapers, magazines, TV, radio websites, and advertisers.

The biggest difference between the two companies is brand integrity. Many places of business forbid their employees from watching videos on YouTube because of the extensive amount of inappropriate and meaningless content. In contrast, all of the videos that flow through the NDN exchange are filtered by a team of editors to ensure "brand-safe" content and quality advertising for its partners.

The fact that anyone can upload videos to YouTube and virtually anyone can create a Google Adsense account suggests that YouTube will become more and more inefficient for publishers, content providers, and advertisers. As the website becomes saturated with low-quality videos, it will become more and more difficult for content providers to generate revenue through the platform.

NDN is meant to be a solution for content providers, advertisers, and publishers who are frustrated by their experiences with content exchanges. It seems the Company may benefit from YouTube users who are seeking an alternative.

How will NDN help Yahoo generate profit?
So, why should Yahoo be interested in NDN? Because NDN will enable Yahoo to compete with YouTube, (owned by Google Inc) in the booming streaming video industry.

If Yahoo purchases NDN, both companies will benefit. NDN's extensive video library will give Yahoo a giant foothold in the video industry. And Yahoo's massive access to capital will enable NDN to grow faster than it could on its own. The synergy of the acquisition could mean huge profits for Yahoo.

How much profit are we talking?
Purchase price: rumor has it, Yahoo might buy NDN for $300 million -$400 million. Let's try to ballpark what it could be worth in the future by comparing it to YouTube.

Future value: According to Morgan Stanley, YouTube may be worth $20 billion by 2020. YouTube currently has over a billion unique viewers per month, whereas NDN has about 51 million. Assuming monthly views are a good way to value a streaming video company, NDN should be worth roughly 5% of YouTube. If NDN grows at a similar rate, it might be worth $1 billion by 2020.

Return on investment: for Yahoo, a $350 million investment turning into $1 billion means an ROI of 185% or about 19% annual return over a six year period.

The calculations above are rough and based on some hefty assumptions. But the reality of the situation is NDN has achieved 50 million unique monthly viewers on its own. With access to Yahoo's capital and expertise, NDN could be worth significantly more than $1 billion by 2020 and could be serious competition for Google's YouTube.

So, will the acquisition happen?
According to a source in a Wall Street Journal article, the acquisition talks might not happen. A spokeswoman of NDN was even quotes saying "NDN and Yahoo are not discussing an acquisition at this time." Regardless of the current situation, it's worth keeping an ear to the ground for developments. If the transaction occurs, it could be huge for Yahoo shareholders.

Disclosure: I am long GOOG, GOOGL, YHOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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