Consider for a moment that this new company would have a market cap double that of another respected conglomerate — Loews (L) — capable of making some very big acquisitions. The new business’s mandate will be to deliver an annual return on invested capital of 10%. It wouldn’t be easy. Berkshire Hathaway has averaged 6.8% annually over the past five years. So perhaps 10% is far too optimistic … but even half that still is better than Yahoo’s current situation.
In the first quarter, YHOO operating income declined 84% to $30.2 million on $1.1 billion in revenue. Diluted earnings were 29 cents per share. Without the gains from Alibaba and Yahoo Japan, its earnings would have been less than 2 cents per share.
Continuing to incur such meager returns will only hurt existing shareholders.
Two Other Available Options
Yahoo does have a couple other ways it could go.
The first is for Yahoo to pay a special dividend from the cash it will receive for the shares it sells in the Alibaba IPO. Gross proceeds could be as high as $23 billion (selling 9.5% stake at $245 billion valuation), which amounts to $22.60 per share given 1.03 billion shares outstanding at the end of Q1 — a whopping 66% yield based on its current share price.
You could do that … but YHOO stock likely would crater shortly thereafter as investors take their money and run.
A second option is for Yahoo to buy more businesses that will help it compete in online media. But that’s a losing proposition that will only squander the huge payday Yahoo has generated from Jerry Yang’s brilliant $1 billion investment in Alibaba back in 2005.
Forget about trying to run with Google (GOOG) and all the other big dogs out there; simply make better investments in companies that other people run.
Just like Berkshire Hathaway does so successfully.
No, the best option (in my opinion) is to create a new company that would hold the remaining shares not sold in the Alibaba IPO. With an optimistic $245 billion valuation, those shares would equal the market cap of Yahoo, so it wouldn’t be unreasonable to issue new shares on a 1-for-1 basis. Yahoo would then turn around and lend the new company $23 billion or whatever amount it receives from the Alibaba IPO.
The move would provide a decent amount of income to Yahoo while it seeks to find a buyer for both its Yahoo Japan stake and its core operations. The risk is Jeff Reeves and others are right about its core operations having no value. The reward is exactly the opposite.
And what’s in it for Marissa Mayer?
Assuming she pulls it off, she’ll get credit for finding a buyer for the part of the business nobody thought was worth anything. Second, and even more important, she’ll be able to run the Berkshire Hathaway of the tech world. These two achievements would cement her status as an icon in the tech sector while successfully extricating Yahoo from an impossible position.
Not quite Houdini — but close.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.