Private Equity Should Take Yahoo Private With a $35B Offer

A long time ago - and I mean long before the Microsoft (MSFT) song and dance - I asked if Yahoo (YHOO) should go private, on the basis that by 2010, it could be spun off again and be worth far more, roughly $100B, to be precise.

In 2008, Yahoo will make over $7B in revenues… so increasingly, my math does not seem all that off.  Here’s the math from my post long ago:

Yahoo could be generating revenues of $9 to $18 billion in 2010.

Its profit margin was 24% and 36% in 2004 and 2005 respectively. Say it can maintain margins of 25% (hey, they won’t be hiring as aggressively as Google and there is only so much purple paint out there), this means that it can be generating profits of $2.5 to $5 billion per year, at a P/E of 25 (it’s now at 33 today), that’s a market cap of $62.5 billion to $125 billion in 2010, or an average of $93.75 billion.

With those kinds of revenues and margins, it will have more than $10 billion in cash, so a market cap of just over $100 billion.

Reading Michael Arrington’s latest tearing into Jerry Yang, I wonder,

• with its stock hovering at $22,
• a market cap of $30B,
• an enterprise value of $28.23B,
• capitulation in search to Google, and
• its sale to Microsoft having been kiboshed,

I think Yahoo should go private.  The argument against the private equity route is the credit market, but Yahoo is an amazing company with top-notch assets.  The problem has been its culture, its people, and its lack of execution.  Those are all fixable things.

But the going private route is now one of necessity.

So long as YHOO and Google (GOOG) compete for investors’ money, GOOG will perform better than YHOO. The specter of YHOO’s stock at $20, then $18, then $15 is not something that will help employee morale, recruitment, or retention.  Look at what happened this week.

More importantly, Jerry Yang has made it clear that he has no interest in managing the company for shareholders, he wants to run it for himself.

As an entrepreneur, I understand where he’s coming from, though I disagree and believe his actions have been unethical.  But he’s not a saint, he’s an entrepreneur, builder and business person, and if he wants to maintain control of the steering wheel, hey, what can others do.

Shareholders can vote with their stock: I did, I sold at $28-30.

Employees can vote with their loyalty: you saw what happened this week.

I don’t think Jerry Yang would find enough suitors to match MSFT’s $45B offer… that is moot now.  But with an enterprise value of $28B and nothing exciting on the horizon, would most shareholders really balk at a $35B offer to go private?  I think most would go for it… that would be the last step in Yang’s journey for full control of the company.  Of course, he would not have full control, but he would buy time - lots of it - to do whatever it is that he wants to do.  And if he does not, well, he’ll have a bunch of private bankers to deal with…

Comments

[rolest]

Good Thinking!!!
I am an investor and almost passed out when the deal of the century didn't go down. Personally, I think Jerry needs to speak with a certain type of doctor that may be able to help him with his ego, or whatever his problem is. In any case, I think you have a very good point here. If he dances with Google, they just might step on his toes. (That hurts!)...And before long, he may be long gone! He can't win with a loosing hand! Going private however makes a lot of sense. If he is a good boy, and satiates the bankers wants and desires (they like golf for instance), he could still be in control, and since everybody is leaving him, the bankers could put in some good people to get things going again, also increasing the value. If he does nothing, or if he sells his soul to Goliath, he's sooner or later, going to wish he made the right decision in the beginning, in which case he would be sitting on the mountain top looking down right about now. Private...Good Thinking!!!

[ardano]

fascinating...and in theory interesting. However, as a practical matter, can a deal PE be done? I'd like to pose the question to alpha readers...

[Stock Miser]

A deal with Microsoft would have been the end of Yahoo, both as a business and as a culture. I can understand why Yang didn't want that. One can argue whether it was good for shareholders for that deal to fail, but I don't honestly think Yang was thinking about the shareholders as much as he was thinking about Yahoo as a business entity. Going private seems like it would be a good idea and very worthy of consideration under the circumstances as it would preserve Yahoo as a business as well as (probably) pacify activist investors who seem to think that money is always more important than principles.

[tyneham]

Why would private equity waste US $35 billion plus to save a Titanic which may sink evem deeper? As a vertran head-hunter and management consultant, I have seen credible business plans to say that $35bn private equity would help finance and create several comparable Yahoos, Googles and other top 100 global brands in a few years.

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By some logical estimates, click fraud could be over sixty percent. However, even one percent of $90 billion of global 2008-2009 Internet ad spend is too high, mainly because advertisers, big or small, are still deceived, overcharged by millions and thus defrauded every day.

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