You do not need a CFA to realize that Yahoo! (YHOO) is an undervalued company. Yes, the company once synonymous with the World Wide Web is now facing numerous challenges, but between investments in Alibaba, Yahoo! Japan, a myriad of recently acquired US-based properties (Flickr, Del.icio.us, etc.), the company is worth more than $32B.
But, tell that to Wall Street investors and analysts who keep pegging Yahoo!’s growth (or lack thereof) to Google’s (NASDAQ:GOOG) and end up favoring the search leader.
Reading up on John Battelle’s predictions for 2008 - in which he forecasts AOL’s (NYSE:TWX) Platform A being spun off - I wondered, should Yahoo! bundle its Yahoo! Network and spin that off too to unleash shareholder value?
Step 1: Defining the Networks
First, some clarifications:
- AOL Platform A is basically all of the disparate ad networks Time Warner has bought over the years, and include: Advertising.com (which we included in our Top 10 M&A Web Deals of All Time), along with TACODA, Third Screen Media, Lightningcast and ADTECH.
- Yahoo! has hysterically been all about the Yahoo! Property: The billions of pages generated on Yahoo!, Yahoo! Finance, Yahoo! Games, Yahoo! Mail, etc. But seeing Google extend its reach online and reach 76% of US users (via AdSense/AdWords) gave Yahoo! an incentive to open up.
AOL’s decision to create Platform A is interesting: it repositions AOL.com - once a walled garden sheltered away from the anything-goes sites and pages of the world wide web - to a network outside of AOL.com, and this just a couple of years after AOL.com relaunched and became an open, free portal. This is very bold and brave from Time Warner, but leveraging Advertising.com, which is the largest ad network on the Web, could make this a success.
This opening up came in a few ways: for one, it did not automatically rebrand companies it bought, namely Del.icio.us and Flickr.
Second, it decided to reposition the Yahoo! Publisher Network and begin repping ad inventory on newspaper sites. These give Yahoo! valuable ad placement on premium sites, something that helps boost Yahoo!’s ad rates by offsetting the long tail of Yahoo! less-than-desired inventory.
Step 2: Buy Networks - Yahoo!’s Recent Acquisitions
But taking this one step further, this past year Yahoo! bought Right Media - an ad exchange - and Blue Lithium.
While Yahoo! paid $300M for Blue Lithium and an eye-popping $725M for Right Media (investing $45M for 20% at a valuation of $225M and then buying the remaining 80% for $680 at a valuation of $850, or a weighted average of $725M), I do not think Yahoo!’s stock will realistically project the value these networks represent. Yahoo!’s stock price will reflect the incremental gains these networks create for the company, but the value these networks have from a capital gain perspective is clearly not captured in the stock.
Step 3: Spin Off the Networks
If I were Yahoo!’s board, CEO or CFO, here is some financial engineering I would consider doing: I would essentially bundle all of the “non-Yahoo property businesses” (so effectively the network business) and spin it off into a separate company.
Step 4: Raise the Money (But How Much Money?)
Yahoo! would remain a major shareholder, but by selling a portion of this entity, it could raise a lot of money to compete for deals against Microsoft and Google, who respectively have $19B and $13B in cash. Yahoo!, by comparison, has a paltry $1.5B.
The Yahoo! Network generates well over $100M in annual revenues - the psychological threshold for revenue requirements in an IPO - because Blue Lithium alone did $100M in revenues in 2007 (at least according to a story in Business 2.0 back in 2006, which we covered in this post). Add on Right Media’s revenues, the revenues generated by the newspaper consortium, and all other network-based businesses, you are looking at revenues for the Network business at anywhere from $200M to $500M in revenues. Frankly, the level depends on how you define and separate Yahoo!’s Network business. Using a mean of $350M, we can start to see what value Yahoo! can unleash, if any.
Doubleclick - ironically not even an ad network anymore - got $3.1B in an M&A for $300M in 2006 revenues. So using a Price to Sales ratio (P/S), Yahoo!’s Network would be worth $3.5B, or just over 10% of Yahoo!’s current market cap. If Yahoo! sold 50% of that to the public, it could raise some $1.75B, which would incidentally double its cash hoard.
If we wanted to use a Price to Earnings ratio, then we need to keep working a bit.
Ironically, while networks are low-margin businesses, ad networks have better margins than content sites. Yahoo! is not a content site, granted, but it is a media company, so we can confidently say that Yahoo! Network would provide better margins than Yahoo!
Yahoo!’s margins are 10% or so, I think the Yahoo! Network business can garner margins of 25%, if not more. With $350M in revenues and margins of 25%, this means EBITDA of $87.5M. To keep things somewhat simple, we’ll use Yahoo!’s P/E which is 45.
Doing the math the second way, Yahoo! Network would be worth roughly $4B. Selling half of it to the public would add $2B to Yahoo!’s warchest.
Anyway you dice it, Yahoo! Network could effectively:
- Reap the same benefits from their recent acquisitions
- Simplify the story to Wall Street
- Unleash shareholder value
- Raise money for acquisitions