3 Value Realizations From Yahoo's Bidding Process

  • The Daily Mail bid shows that there is great potential in Yahoo's media properties.
  • In addition, having ~40 bidders gives Yahoo a better chance of selling at a decent premium.
  • Lastly, the Starboard management reshuffle should also bolster investor confidence moving forward.

First, certain units of Yahoo (NASDAQ:YHOO) such as Yahoo! Finance, Yahoo News, Yahoo Sports and Yahoo Search might be more valuable if implemented and managed the right way.

One revelation from the bidding process is the interest from Daily Mail, the British newspaper and global tabloid website, expressed on the 11th of April, 2016. Daily Mail is one of the top 10 most visited sites in the world according to Pew Research Center. Founded in 1896, Daily Mail has relied on a tabloid mix of conservative political views and celebrity gossip to drive sales. Daily Mail is now interested in Yahoo's news and media properties such as Yahoo! Finance, Yahoo News and Yahoo Sports and is one of the 40 bidders for Yahoo properties.

This is important because it reiterates the idea that value from Yahoo's core business can be unleashed through a series of ways to expand revenue growth in different units.

First, just like the Daily Mail, Yahoo can leverage unit names like Yahoo! Finance and start hosting business exhibitions and conferences to expand its horizon and revenue stream. Second, publishing and selling business-oriented publications. Yahoo! Finance is a recognized name which, with, proper marketing, can create a credible brand name in publishing finance related documents.

Third, I believe that Yahoo's reluctance to partner with hardware companies to aggressively promote Yahoo search greatly diminishes the companies value. You need to market your search engine more aggressively. For instance, Google Inc. pays Apple a hefty fee of $1 billion to keep its search bar on the iPhone. Besides that, Google manufactures its own phones and that allows it to expand its search engine reach.

Google is the dominant player in the search engine market but there is room for growth for competitors like Yahoo. First, Google's PageRank algorithm license expires next year in 2017. This creates some opportunities as I outlined in the article,"Will PageRank Expiration Threaten Google's Dominance?" Although there have been different new versions of Google's major algorithms namely PageRank, Anchortext & Proximity, they can attempt to imitate what works and try to have a competitive search engine.

Second, acquisition premium is still alive and well: There is still value in streaming operations and spinning-off non-core businesses

Reports suggest that Yahoo is projecting declining revenues in FY2016. The bidding process is exposing facts about the company that investors would otherwise not be aware of. Based on the bidding amounts, we will be able to ascertain a precise price that investors are willing to pay for the company based on the numbers given and the projections anticipated.

Besides, currently the 15% stake in Alibaba is worth ~$29 billion relative to Yahoo's total market capitalization of ~$34 billion. Representing a huge value proposition once that stake is sold (without taking taxes into consideration). Besides Alibaba, Yahoo's 35.5% stake in Yahoo Japan is worth ~$8.26 billion pretax.

Because there are currently ~40 bidders for either Yahoo as a whole or for different units of Yahoo, there is great potential for a good premium once the buyer is revealed.

Third, Yahoo is likely to see a near-term price appreciation from a potential management reshuffle or a buyout offer of one, two or all of its business units.

The hedge fund Starboard is still pushing for a management reshuffle this coming summer. This move is likely going to bolster investor confidence in Yahoo as outlined here.

This will be the third attempted management reshuffle for Yahoo since 2008. But it is likely to carry a more powerful message or impact because many people have recognized the hidden value in Yahoo. As a result, the need for someone who can unleash that value is growing stronger and stronger.

Yahoo business has declined as advertisers have moved to other popular companies such as Google and Facebook. Yahoo will need to create a convincing value proposition for advertisers.

This is why I believe that Yahoo's executive departure should not be viewed solely as a negative move for the company. A CEO does not run a company alone. Therefore, the growth lag in Yahoo cannot only rest on Marissa Mayer's shoulders.

This means that with a necessary management reshuffle either from Starboard efforts or from a potential sale, the perceived potential value is likely to attract better valuations as the bidding period ends.

Conclusion

Yahoo has enough cash to settle its debts thus reducing any credit risks. In addition, according to Yahoo's most recent quarter , the company has $5.86 billion in cash. It is less leveraged with only $1.23 billion in debt. I used the word "only" because the company has enough cash to pay down its debt and still remain with $4.62 billion in cash.

With a book value per share of $30.79, Yahoo is almost trading as a value play. Yahoo's stock price has room to see a price appreciation either from investors realization of its hidden value or from an acquisition premium from its bidding process.

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