The chief executive officer (CEO) of the Chinese Internet company Alibaba, Jack Ma, has breathed new life into the potential bidding for Yahoo, telling a Stanford University audience that he was “very interested” in the company.
With Ma’s apparent entrance, an increasingly crowded field has lined up to weigh bids for Yahoo Inc.. Private equity firm Silver Lake, Microsoft Corp., News Corp. and other investors and strategic buyers are among the potential bidders.
But the first question for any suitor of Yahoo is: what are you buying, exactly?
While Yahoo is best known for its huge collection of Internet properties, most analysts and investors say the company's most valuable assets lie in its 40% stake in Alibaba and its 35% stake in Yahoo’s Japan affiliate.
Reaching out: Alibaba chief executive Jack Ma says he’s very interested in buying Yahoo. David Paul Morris/Bloomberg
Yahoo is under some pressure to do a deal, after ousting Carol A. Bartz as CEO last month without a successor—or a new direction—in place. While the company is in the process of hiring an executive search firm to find a permanent replacement for Bartz, according to a person close to the board, many analysts expect Yahoo to let its review of its business take precedence. And Yahoo’s value may take another hit when it reports it third-quarter results on 18 October.
Of the potential bidders for Yahoo, Ma has been the only one to speak openly about his interest. His comments, made late on Friday, helped propel shares in Yahoo up 2.7% on Monday, to $13.53, amid a slump in the broader stock market. That gives the company a market value of nearly $17.1 billion.
Broken up, however, the pieces of Yahoo may be worth much more.
Here’s a back-of-the-envelope valuation of Yahoo's parts:
A tender offer for Alibaba shares led by the investment firms Silver Lake and DST Global Solutions Ltd valued the Chinese company at more than $32 billion, thus putting Yahoo’s stake at more than $13 billion. Assuming a normal corporate tax rate, the net proceeds from a sale of those shares could net Yahoo about $9 billion.
Meanwhile, Yahoo’s stake in its publicly traded Japanese affiliate was worth close to $6.5 billion as of Monday’s close. After taxes, a sale of those holdings could fetch roughly $4 billion.
Yahoo also had about $3 billion in cash and liquid investments as of the end of the second quarter.
The biggest trick is figuring out what the remaining piece, Yahoo’s core Internet business, is worth.
The average estimate of the company's 2011 earnings before interest, depreciation and amortization is about $1.5 billion, according to the data provider Capital IQ. Given Yahoo’s difficulties, analysts have been loath to assign the company a particularly high earnings multiple, potentially pegging the core business at just $5 billion or so.
But Yahoo has also talked up some of its other assets, including more than 1,000 patents, including those for search and display advertising, that the company believes would fetch high prices.
So far, no front-runner has emerged.
A number of private equity (PE) and strategic players are contacting Yahoo and holding meetings with other suitors to determine what groupings could make sense. Many are flocking to Ma, hoping to curry favour.
Under the terms of a 2005 agreement that Yahoo struck with Alibaba and Yahoo Japan’s majority shareholder, Softbank Corp., the Internet company must give its two partners 15 days of exclusivity to buy out its stakes. After that, Yahoo can sell those holdings to any buyer of its choosing.
Several media or Internet companies, hoping to leverage Yahoo’s popular news sites, could be strategic partners, including Google Inc., Facebook Inc., Comcast Corp. and Microsoft, which made a failed bid for Yahoo in 2008.
News Corp., the former owner of fallen social network MySpace, has recently emerged as one of the most proactive suitors.
The media conglomerate has contacted Yahoo and several financial firms, including Silver Lake, according to three people with knowledge of the situation who requested anonymity because the talks were private.
Still, Alibaba, which has long been interested in clawing back its shares, could ultimately take the driver’s seat in a deal. It might buy back Yahoo’s stake in it and then slice up the rest of Yahoo and sell pieces to PE and strategic buyers. To do so, it would need a consortium of deep-pocketed investors, since any deal would require about $25 billion, or more, said Herman Leung, an analyst with Susquehanna International Group.
With any deal, Yahoo’s board would probably prefer to sell the company in its entirety, instead of selling it off piecemeal, so as to minimize tax charges.
“There are probably at least 10 scenarios that could play out here,” said Leung, who says he believes a sale process could take six months or more.
But time is a concern.
“Yahoo’s biggest risk right now is that the remaining value of the consolidated operations fades due to senior management attrition,” said Jordan Rohan, a Stifel Nicolaus analyst. “There’s an urgency at the board level to make something happen.”
©2011/The New York Times