- In a last-ditch fight for its existence, Yahoo decided to sell its core business.
- Media companies and P-E firms interested in the deal were approached by the company.
- Yahoo is committed to the process as part of reshaping the company into a holding company.
Web giant Yahoo (NASDAQ:YHOO) has experienced some extreme turbulence in the recent months that started when the company announced the Alibaba (NYSE:BABA) holding spin-off and continued after it changed its course 180 degrees to a core business spin-off. In the background, activist shareholders firmly suggest that CEO Mayer take a particular course of action while media and internet companies are eyeing Yahoo’s core business to gain some competitive advantage through it.
A few years ago, when Marissa Mayer was appointed to lead Yahoo’s transition from a declining obsolete web portal to a technology leader, investors believed Yahoo was on the right path for incredible growth and that a second Google could emerge. Investors were very patient and backed the company and its CEO throughout the disappointing quarterly results, failed acquisitions, and business decisions that did not drive Yahoo’s growth as expected.
Through the years, the value of Yahoo’s holdings in Alibaba and Yahoo Japan CP (OTC:YAHOY) increased and outperformed Yahoo’s core business value until it reached a point when investors claimed that Yahoo’s only jewel was its holdings in these Asian companies.
To capitalize the valuation gap between Yahoo's core business and its Asian holdings, CEO Mayer decided to spin-off Yahoo’s stake in Alibaba into a newly created public company that would be a special purpose vehicle for holding Alibaba’s share, under the belief that some big company would acquire the entire spun-off company to get a significant portion of the Chinese Internet giant. To benefit the company and its shareholders, Yahoo coupled the Alibaba split together with spinning off its small business services unit and filed for a tax-free spin-off.
This was a favorable scenario, for investors, that potentially could have unlocked additional value for Yahoo’s shareholders. However, the IRS decision not to provide any pre-ruling in this matter raised investors’ concerns that this spin-off could be taxable, in the end, and would not bring the same added value as might have been expected.
Under pressure from the activist investor, Starboard Value, Yahoo decided to reduce costs significantly by cutting a third of the workforce and spinning off its core business. Yahoo’s core business suffered from the market-wide acceptance of its devaluation, and most investors currently consider it as a burden to the company, which is using most of the resources and generating very small income. Yahoo’s management mentioned that it believes in its ability to turn the company around and revive it within one or two years. However, that was too much for Yahoo’s investors, and they required a more immediate action plan.
Amid rising investor pressure, Yahoo hired financial advisers to provide financial counsel to the company for a potential sale of its core business. The company approached some media companies and private equity funds that had showed their interest before and expected to start receiving bids in a month. The list of companies that Yahoo approached includes media companies such as Verizon (NYSE:VZ), AT&T (NYSE:T), and Comcast -A (NASDAQ:CMCSA), as well as P-E firms such as Bain Capital, TPG, and KKR. Each company has its own reasons to acquire Yahoo’s core business, either to leverage Yahoo’s content to strengthen their core business, as in the case of Verizon, AT&T, and Comcast, or to hold it as an asset that could be improved, raised in value and sold to high bidders, as in the case of Bain, TPG, and KKR.
This uncertainty about the company’s future is reflected in a volatile share price that might intimidate some investors. However there are two things to keep in mind: first, the end goal of this process is to maximize value for shareholders. Currently, it seems that the only way it can be done is by reducing Yahoo to a holding company that owns stakes in Alibaba and Yahoo Japan. Second, the fact the Yahoo is proactively approaching potential bidders highlights the company’s commitment to this process and increases the probability to complete the sale.
The intensified bidding war over Yahoo’s core business brings Yahoo one step closer towards completing the first phase of the sale – to receive a satisfying bid and close terms with a potential acquirer. Once this step is finalized, Yahoo’s stock price will hike to reflect the additional value this move brings to shareholders. From that point on, the Yahoo stock price will appreciate steadily as the deal will approach a final agreement and execution that meet shareholders' vision and expectations of the deal. In my opinion, the current uncertainty allows investors to pick up Yahoo’s shares at a reasonable price before the deal is finalized.