I have had one relationship or another with Yahoo! (NASDAQ:YHOO) for 15 years now - first as a user, then as an investor, then as a developer (well, my team was), then as an analyst, and now as a content provider.
I think all this “loser talk” with Yahoo! has to stop. I appreciate those who realize what a great platform Yahoo! remains, is and can be… if admittedly they get their act together (this is the oldest Web company, what do you expect?)
Anyway, after Carol Bartz got fired, a bunch of people asked me what I thought of Yahoo! and what might be in store for them. If you’re wondering about the cat picture, it’s pretty easy: while a cat has nine lives, Yahoo can’t afford to be a you-know-what… they need to see the glass as half-full. (Note to self for next time: a glass with beer half-way up to the top would’ve conveyed the same message)
I figured I’d write the following for TechCrunch: Yahoo!’s Options. I’ve reposted it below, as well — enjoy:
With Yahoo! firing Carol Bartz—by phone no less, we are left to wonder what the next chapter will be for the one-time Internet pioneer.
So, what can Yahoo! do? Let’s look at the options:
OPTION 1: BUY HULU
The company has been rumored to be in the running to acquire Hulu but with Hulu CEO Jason Kilar hailing from Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) willing to pay more for the in-demand video company, chances are looking slim that Yahoo! will walk away with Hulu. Knowing that Carol Bartz has rubbed some people the wrong way, it is possible, however, that Kilar didn’t feel comfortable negotiating or reporting to Bartz, this move could pave the way for Kilar to become CEO of Yahoo!, or, perhaps, see Ross Levinsohn being elevated to CEO and Kilar running media reporting to Levinsohn. Anything can happen in that reporting structure, I think, with Kilar being more of a product and operations executive and Levinson more of a deal maker who is very bullish on video.
OPTION 2: SELL ASIAN ASSETS, RAISE WARCHEST OR PAY DIVIDEND
Wall Street has a tendency to misprice stocks. Right now, the lion’s share of value in Yahoo stock is in the Asian assets Yahoo partially owns. By now, it’s unimaginable that were Yahoo to sell those assets its value would be $0. Unloading assets would be a typical case of “unleashing value” and would give Yahoo! a massive war chest for acquisitions, or the ability to pay out a one-time special dividend.
With Yahoo!’s spotty acquisition record, some investors may prefer the dividend, but that would be an admission that it’s a modern day “utility”, a value stock that has no upside. More likely would be a series of acquisitions, which may include Hulu if it remains independent and doesn’t end up in the hands of Amazon or Google.
OPTION 3: PRIVATE EQUITY
Yahoo has forever been in the cross-hairs of PE firms, who could gang up and make a run for the company. With a market cap of $17 billion and revenues of $6 billion, it is not as far-fetched as it once was when Microsoft (NASDAQ:MSFT) offered $31 per share, or nearly $45 billion. Today the PE firm option remains a viable one, though what the PE firm’s strategy becomes remains to be seen.
The PE firm’s strategy would be to maximize the total sales price of the various components, to commence an immediate dismantling, selling off the Asian assets, unloading Flickr, and eventually selling Yahoo! to a big media company or take a leaner, meaner “Yahoo! light” public down the road. It is conceivable that the sum of the parts could yield well over $25 billion. The premium on those Asian assets alone could represent more than what Yahoo! is trading at.
OPTION 4: STATUS QUO
Despite what the cynics and arm-chair quarterbacks would argue, Yahoo! remains the best placed digital media company with a massive user base, a lot of advertiser relationships, strong email products and ever-increasing original content, both text and video. And, as one of the earliest aggregators, it also has rights to a lot of content – incidentally, much of the content that Hulu has access to. (Disclosure: WatchMojo is a provider of premium videos to Yahoo!, and AOL, parent of TechCrunch.)
Sure, the company’s choice in Carol Bartz may have seemed misguided – especially in hindsight – but the fact remains, advertisers and users don’t care what bloggers or analysts say. If the company can get its act together, it remains a force to be reckoned with, especially as Facebook and sexier firms like Zynga still need to better articulate to Wall Street and Madison Avenue what their true “net-of-hype” value is over the long term. Last year, for example, Groupon (NASDAQ:GRPN) was the “it” company; this year, it pulled its IPO.
However, with Yahoo!’s one time strength – display advertising – being increasingly under attack by both Google and Facebook, Yahoo! does need to get more aggressive in other areas, with video being as good as any.
OPTION 5: IMMEDIATE SALE TO BIG MEDIA (COMCAST, DISNEY, NEWS CORP).
Antitrust concerns notwithstanding, Yahoo! would be a very attractive distribution and new media content producing outlet and platform for a variety of large media companies, be it Viacom (NASDAQ:VIA) or Comcast (NASDAQ:CMCSA). While News Corp. (NASDAQ:NWS) may have at one time been a likely suitor, the cloudy forecast from the News of the World scandal and Rupert Murdoch’s overall bearishness over all things digital signals that News Corp. would not be interested, despite a still-impressive market cap of $40 billion. Disney (NYSE:DIS) not only has a $60 billion market cap, but with former Yahoo! executive Jimmy Pitaro now at Disney Interactive Group, there’s a discussion to be had.
OPTION 6: IMMEDIATE MERGER WITH BIG MEDIA (CBS, Viacom)
CBS and Viacom (which were once one company) boast lower market caps of $16 billion and $26 billion, respectively. As such, here we would be looking at mergers, rather than acquisitions. Both companies would present interesting operational fits and cost savings would allow for additional value-unlocking opportunities. However, CBS’s $1.6 billion acquisition of CNET (which I called correctly) gave it enough indigestion given the timing, so I am not sure if its shareholder base would welcome a marriage-of-equals with Yahoo! Viacom, meanwhile, might be a better content fit anyway, but both companies need to find ways to attract and engage younger generations, so a marriage here may not actually address that challenge.
OPTION 7: IMMEDIATE SALE TO MICROSOFT
Microsoft’s MSN unit has invested heavily in the pursuit of Internet riches. Microsoft (MSFT) wisely invested $240 million for a 1.6% stake in Facebook. It then acquired the heavily-hyped Powerset to give Google a run for its money in search. It also paid off Yahoo! for the privilege of powering Yahoo!’s search. In the end it hasn’t made a material impact, though a full-on acquisition of Yahoo! probably would move the needle and allow for considerable cost reductions in staff, offices and R&D expenses. Would Yahoo!’s board welcome this? Well, they didn’t the first time around at $31 per share. Would it take $31 to get a deal done today? I don’t think so, I think a $25 offer would send Yahoo!’s board running in the streets naked, chanting Steve Ballmer’s name (Disclosure: WatchMojo provides videos to MSN.com and all MSN platforms such as XBOX.)
OPTION 9: MERGER WITH AOL
Last but not least, we’ve heard about the oft-mentioned suggestion that AOL and Yahoo! should merge, with Tim Armstrong running the combined operation. I don’t buy it. This won’t happen. While AOL would love for this to materialize, I just don’t see Yahoo! being interested in AOL, their assets are too similar and combining them doesn’t help either one with their larger challenges (Disclosure: AOL, too, is a WatchMojo distribution partner.)
The bottom line is that despite what the noise suggests, Yahoo! generates $6 billion in revenues and $1.2 billion in net income, but its Asian assets are hogging its market cap. The only way to unleash that value is Option 2, sell off those assets to let the Street value Yahoo! properly. It could sell those assets but remain operationally involved in a joint venture or commercial agreement.
Regardless of who the CEO is, Yahoo! will remain persona non grata, so it should sell all Asian assets and maximize the cash it can raise. It should avoid paying out a dividend – Yahoo! has the potential to become a growth stock considering that online media will surpass television advertising by 2016.
Even traditional media companies are trading for almost 15 times earnings, so selling Asian assets would be a $10 billion-plus windfall and the less opaque ownership could give Yahoo! a $15-20 billion market cap (about the same as it has now) and a potential enterprise value of $25-30 billion. It’s foolish to think that holding on to Asian assets is Yahoo!’s holy grail when it has zero leverage on those assets (see: Alipay mess, which probably ultimately cost Bartz’ job).
With the $10 billion in cash on its balance sheet (right now it has $2 billion) it can then start to position itself as the leading video company and take on YouTube. The reality is that Hulu is number 2 in video but its own future is in doubt; VEVO’s fate will mimic that of Hulu’s (it will become a victim of its own success), while Facebook has yet to really focus on video properly. The future of Web content is in video, in my humble opinion, and that remains Yahoo!’s last chance to reclaim its once-lost glory.
Disclosure: I don’t own any shares directly, but my company provides them with a bunch of video content.