Mr. Massive has a great piece (here) estimating the possible take-out value of Yahoo (NASDAQ:YHOO), which currently trades at around $13.17 per share, a market cap of $16 billion in a market where direct competitors like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) are worth 10 times more.
The move to sell accelerated over the year withword from CEO Jack Ma (right) that his Alibaba Group (OTC:ALBCF) , the Chinese eBay-Amazon (EBAY/AMZN) in which Yahoo holds a 40% stake, is interested in taking the whole company.
This should have the arbitrageurs buzzing about the stock on Monday. Expect a major tradeable pop in the near term.
But as a tech analyst, I have a different question. Can anyone, even Jack Ma, extract real value from a Yahoo take-out? What price should your arbitrage be based upon?
Ma thinks he can make the deal work.
For one thing, it would get him out of what has turned out to be a very bad deal. He was practically a start-up when he sold the big stake to the Americans, his ambitions limited to giving Chinese exporters an easier way to link with overseas customers. Now he not only controls China's b2b sector, but most of its b2c sector, along with its auction sector, and he has big ambitions to deliver his own tablet., perhaps to a global audience.
Buying Yahoo would give that tablet the global platform Ma wants, not to mention an American brand name for western customers. Even paying a 40% premium over Yahoo's stock price to get back full control of Alibaba sounds like good business to Ma, who worked with the government to get out of Alipay, a Paypal clone, for just $2 billion, the event which set current events into motion.
The problem is an Alibaba deal might take over a year to close. There are bound to be political objections if one of America's best-known Internet names goes into Chinese hands. Regardless of the merits or the truth of the matter (Yahoo ceased to be a major Internet competitor years ago), there is bound to be a political firestorm.
So a quick deal needs a partner. And there is a possible partner on the board.
Microsoft, which in 2007 bid $47.6 billion for Yahoo – three times the company's current value – might be interested in what's left after Ma gets his stake out. If they see any value remaining at all in Yahoo's online assets, mainly content and software, they might want to do a three-way deal with Alibaba, even act as the company's “beard” as a buyer. That would involve setting a price for Alibaba's stake that would fund a Microsoft takeover, getting Yahoo for next to nothing and avoiding many of the political headaches a Ma move might create.
There would then be many advantages Microsoft could negotiate with Ma. These might include alliances to bring Alibaba-like services to America under Microsoft's brand, even Alibaba's tablet. Imagine if Amazon were facing an online store that sourced direct, or eBay were facing a larger competitor, with Microsoft's brand and Alibaba's back-end processing. Microsoft might even bring Alipay to the states, under its brand.
For investors, however, know that a direct Microsoft takeover would come at a lower price than one from the Chinese. There would be less of a risk the deal would blow up, no political hassles, and Microsoft could throw in its claims against Linux, clearing the way for Alibaba to launch its tablets and phones without calls from lawyers.
One more concern for Yahoo investors. There would likely be no “white knight” in this deal, if Alibaba and Microsoft were cooperating. Google can't bid for antitrust reasons, and would be unlikely to have interest anyway. Amazon is a direct competitor to Alibaba in many ways, but would only be able to rattle some nationalistic chains, making dark hints before regulators that could be waved away through Microsoft's American name.
No one else seems interested at this point in getting into the space, which has become very capital intensive. Understand that before you offer what Mr. Massive would consider a “full price” – north of $25/share.
Disclosure: I am long GOOG.