- Yahoo! is a famous name that is always trying to turn around.
- It has reported a disappointing Q2 and forecast a weak Q3.
- My take is that the company may be worth more dead than alive, and the board should solicit bids.
Background: I have written several times about Yahoo! (NASDAQ:YHOO), beginning with the stock in the low $20's and continuing with the stock above current levels this year. Early on in owning and following the company and its stock, I came to the conclusion that the turnaround was possible, but that its Asian stockholdings were so important and its own asset value as a takeover target was still so great that the stock was a relative bargain on a sum-of-the-parts basis assuming that Yahoo's operations were sold to an acquirer. Having reviewed Q2's results, it seems to me that the board could be well-advised to see what another company would pay to own all of Yahoo!. Whether that company is Alibaba, another Internet or tech company, or a media company such as Disney (NYSE:DIS), is unclear. But, it seems to me that the time has come for the board to seriously consider this process now or soon, before Yahoo loses so much relevance that few will pay up for it.
It's especially important in my view to consider this course of action now, because the Fed has turned hawkish.
Introduction: Everyone knows Yahoo, and that's part of the problem, at least in the U.S. If you're not a user by now, it's tougher to win you over (or win you back, if you have left). What is Yahoo? It's not so easy to answer - again, that's part of the problem. Think of an architect, brought in to do a renovation of a complicated old house whose core style is out of fashion. It may be easy to update it and make it great - or the floor plan and structure may be so poor that it's just a teardown. Yahoo is now on yet another bright "architect", Ms. Mayer, who is readily not able to renovate this old house to make it really shine. Q2 results and Q3 guidance show this clearly.
Discussing Q2, and related topics: It's trouble when management's announcement of sales and earnings start with an apology. What can one say? Overall, business was poor last quarter. Some positive trends from Q1 were reversed. And the immediate future is not so hot, either. As Reuters reported:
Yahoo also forecast third-quarter net revenue, excluding fees paid to partner websites, of $1.02 billion to $1.06 billion, less than the $1.1 billion Wall Street analysts had expected on average.
"What you see is the fundamentals at core Yahoo continue to deteriorate, but there's at least some good news on the Alibaba front," said Macquarie Research analyst Ben Schachter.
Talk about damning with (very) faint praise...
And once Alibaba it trades on the NYSE Arca, presumably next month, we won't need to own YHOO as a proxy. Yahoo is simply losing share of a growing market, as eMarketer projects:
Yahoo's push to maintain its position as a top global ad seller will take another hit in 2014, according to new projections from eMarketer. Though Yahoo's ad revenues will be back in the black this year, increasing its global digital ad revenues by 2.7% after a decline of 2.1% in 2013 to reach $3.53 billion, the company's share of the $140.15 billion digital advertising market will fall from 2.86% to 2.52%. At the same time, Microsoft (NASDAQ:MSFT) will grow its net worldwide ad revenues by more than 20% over 2013 to reach $3.56 billion, eMarketer estimates, accounting for 2.54% of the market-just enough to surpass Yahoo for the first time.
Is Yahoo of interest to Microsoft? It certainly was last decade, and with YHOO roughly at the same price that MSFT was willing to pay mid-decade but with many fewer shares outstanding and all the Asian asset value, plus their current search collaboration, this is one obvious possible acquirer.
Could Alibaba acquire Yahoo? There are no obvious antitrust issues. That could solve the problem of taxes on the unsold shares of Alibaba that Yahoo will own post-IPO. Could that explain the deal the companies struck to let Yahoo sell fewer shares of Alibaba on the IPO, thus allowing Alibaba to sell more and raise more money?
Could a different Chinese or Asian/foreign company be interested in Yahoo? That would be interesting. Since Yahoo's revenues are U.S.-centric, it's an interesting way to enter the U.S. market, at a reasonably low enterprise value. And there are the potentially beneficial tax aspects of the Alibaba and Yahoo Japan shares to take into account, as well.
Markets and business niches both have rhythms. I believe that Yahoo's many eyeballs are very valuable to all sorts of companies. Not only that, I believe that it is important to many companies to keep competitors from gaining those eyeballs. So I think there are both offensive and defensive reasons that Yahoo's assets will be in high demand. Certainly everyone in the business recognizes that gaining control of a huge block of Alibaba shares may be a great thing in and of itself; and perhaps Yahoo Japan is of some strategic interest as well.
The timing and rhythm of the board shopping Yahoo around is important. Great bull markets such as we are in, with the Fed sounding hawkish all of a sudden, can turn into bear markets such as we were in six years ago. The money spigot that is flowing freely today can run dry. The Internet is maturing. YHOO notes restructuring charges - as if it were some tired manufacturing company. The timing is right to sell this company now, it seems to this outside observer, while Yahoo is not damaged goods - at least not in too major a way.
Yahoo is one of those few names, like Disney, that continues to have a warm and fuzzy image. As a company, it hasn't been litigious, and it hasn't made a lot of enemies. It was super-hot when the Internet was young. It's undefined enough that if acquired, the Yahoo brand could be kept if and where desired, and the acquirer's brand used everywhere else.
What is Yahoo worth to an acquirer, excluding its Asian shareholdings? In truth, that's above my pay grade. It's hard not to think it's worth as much as WhatsApp, though ($19 B). But what was that company really worth? I do not know.
As stated, I think that Yahoo sits at the intersection of more than one business niche, and many companies could want it for affirmative and defensive reasons. Enough authors, including myself, have gone through the sum-of-the-parts calculations enough times on Seeking Alpha that there's no point to doing so now, especially with the Alibaba IPO finally looming.
The key question is, what is the mindset of the board? Do heavyweights such as Charles Schwab and the former CEO of Wal-Mart (NYSE:WMT), Lee Scott, want to be directors of a sinking ship? Do they think it's foundering in rough seas with Yahoo trailing in the rough wake created by amazing companies such as Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB)?
If they do not shop this company, and the stock performs poorly, might Carl Icahn take a stake in YHOO? Dan Loeb moved on to greener pastures. Might he return, depending on what market valuation Alibaba achieves and whether YHOO trades cheaply enough relative to its asset value?
We might see some fireworks here, one way or the other.
Conclusion: Of course, perhaps Yahoo is on the verge of actually growing. I could easily be wrong. It operates in growth areas. But I would think that if so, it would be that much easier to pitch this story to acquirers, which would be more willing to pay a premium to acquire this company. And of course, if the company gets shopped, management will be doing everything it can to improve operations. No sale must be done. But it could take time to complete a sale of this company on optimal terms. Why delay beginning the process?
I don't blame management. I just think the renovation job is too difficult; the other houses in the neighborhood keep getting beautiful additions; sometimes your house is worth more to a neighbor, or a rich outsider, than it is to you.
It looks to me as though Yahoo may, like short people in the old Randy Newman song, just have no reason to live.
Additional disclosure: Not investment advice. I am not an investment adviser.