Why Did Yahoo Give Softbank Such a Sweet Price for Overture Japan?

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Includes: AABA, SFTBF
by: Eric Jackson

One of the supporters of our "Plan B" for Yahoo! (YHOO) group, David Sollers, recently contacted me to share some analysis on the recent sale by Yahoo! to Yahoo! Japan of Overture Japan. The whole issue of this sale has been ignored by analysts and the press.

On August 31st, Overture Japan was sold to Yahoo! Japan (a joint venture between Yahoo! Inc and Softbank Corporation (OTCPK:SFTBF) of Japan - Yahoo! Inc has 34% stake in Yahoo Japan).

While there was no information about this on Yahoo!'s site, it was something that Yahoo! Japan made a big deal out of in the Japanese language press. Even the English version of Yahoo! Japan's investor relations press releases site includes this announcement.

The low price at which Yahoo! sold Overture Japan to Yahoo! Japan is something that all Yahoo! shareholders should be concerned with and ask further questions about.

According that press release, Overture Japan, which had revenues of JPY 45.767 billion (US$ 395 million), was sold for JPY 1.557 billion (US$ 13.426 million). That is a price-to-sales ratio of 0.034 for a profitable company with great sales growth (2005 and 2006 figures for Overture are detailed in the press release - and while net income decreased from 2005 to 2006, this appears to be due to one-time charges and/or expenses which are not like to re-occur in 2007, most probably investement in hardware needed for the launch of Panama).

A profitable company is never sold for a small fraction of its annual revenues -- and certainly not in the current market for Internet Advertising companies. In this year of large exits for aQuantive, Blue Lithium, Double-Click, Right Media, etc., Softbank appears to be getting a fire-sale price here.

To put this in perspective, if Yahoo! were to value itself at this Overture Japan price-to-sales ratio, Yahoo! shares would trade for less than 20 cents per share.

Why was Overture Japan sold at this price to Softbank?

Let's take a look at some of Y! Inc's recent acquisitions:

  • Blue Lithium: Yahoo! paid $300 million for this company which is estimated to have annual revenues of roughly $100 million. That's a price-to-sales ratio of 3.
  • Zimbra: Yahoo! paid $350 million for this company which is estimated to have annual revenue of $6 million. That values the company at price-to-sales ratio of 58.3.
  • Overture (now Yahoo! Search Marketing) was bought by Yahoo! for $1.6 billion in cash and stock in October 2003. For that year Overture was expected to have revenue of $1 billion (as Overture became a fully owned subsidiary of Yahoo!, separate figures for Overture were not filed). This valued Overture at price-to-sales ratio of 1.6.
  • If you value Overture Japan at the same price-to-sales ratio that Yahoo! paid for Overture just four years ago (which is probably a reasonable valuation), we arrive at a sale price of $631 million. So Yahoo! has sold off a profitable subsidiary for $13.4 million, when the price should have been in the range of $500 million to $1 billion.

    Why was Masayoshi Son of Softbank given such a great price? How have Yahoo! shareholders benefited from this generosity? I would hope that Sue Decker and Blake Jorgensen would clarify this issue in a few weeks on the Q3 earnings call.

    Disclosure: Author has a long position in YHOO?