Yahoo! (YHOO) CEO Marissa Mayer is under a ton of pressure right now, with Canyon Capital Advisors the latest in a long line of activists and institutional investors demanding change and order at YHOO.
The company seems to be in total chaos, with management seemingly confused about where to go next.
This uncertainty has since trickled down to employees at Yahoo, who, according to a post in The New York Times, have lost faith in management, with only 34% of employees believing that the businesses prospects are improving.
So yes, Yahoo is a train wreck, but what makes Yahoo stock so truly frustrating for investors is that Mayer has a bazooka that could solve all its problems. She just won’t use it.
Chaos Takes Over at Yahoo
The big issue with Yahoo is that Mayer has implemented countless structural changes to key businesses and services, and has spent $3 billion on acquisitions, yet no growth has been created in the company’s core internet business. After big hires that didn’t work out, now Mayer is trying her luck at a cost-cutting strategy. Yahoo will reportedly cut 10% of its workforce.
Nevertheless, YHOO looks like pure chaos: a company with no plan, and whose executives who are so worried about keeping their jobs that they look like deer in headlights. What’s ironic is the fact that YHOO is the one troubled technology company with the ability to unlock real value, if only the deer could inspire themselves to move out of the road.
The most famous example of Yahoo’s inability to act relates to the stake it owns in Alibaba (BABA). YHOO owns 384 million shares of BABA, and had spent the last year plus preparing for a spinoff of those assets. When the IRS did not give Yahoo a favorable ruling, which meant that YHOO could have theoretically got stuck with a big tax bill, Yahoo insisted that it would move forward with the spinoff.
Just recently, Yahoo announced that it is exploring other options, and won’t move forward with the planned spinoff. In other words, Yahoo wasted more than a year, millions of dollars, and still has no plan to divest its BABA holdings.
Yahoo Stock’s Bazooka
As I previously explained, Yahoo should have moved forward with the BABA spinoff. The stake is currently worth $26.7 billion, or all but $1 billion of the Yahoo stock valuation. As a result, the market was already figuring the possibility of YHOO paying taxes into Yahoo stock. There is also a strong likelihood that YHOO would never pay the tax bill regardless of the IRS’s initial ruling, with Yahoo able to make its case in court for many, many years following the spinoff.
With that said, Yahoo’s stake in BABA isn’t the only piece of the company’s bazooka. Remember, all but $1 billion of Yahoo’s valuation is tied to its BABA stake. Then, YHOO has $7 billion in cash and a 35% stake in Yahoo Japan that was recently valued at $9 billion. And finally, Yahoo’s core internet business is worth $6 billion to $8 billion according to SunTrust analysts.
Hence, the bazooka is a sum of parts that is worth far more than Yahoo’s market capitalization. The only way to unlock this value in Yahoo stock is if management decides to divest one or several parts. The problem is that Mayer and company are too scared to divest anything, having stuck to their guns for a full year and then changing their minds at the last possible moment to back out of the BABA spinoff.
In retrospect, this fickleness is why hedge funds, activists, and institutional investors are so frustrated. It’s not all that difficult to identify the upside value in Yahoo stock through its sum of parts, but the problem is that Mayer has to actually sign off and execute the divestment of assets to unlock value.
Until that day comes, and YHOO announces an actual plan and sticks with it, Yahoo stock is likely to underperform. So unless a divestment occurs, or Mayer is fired, investors shouldn’t expect anything too exciting from Yahoo stock.
As of this writing, Brian Nichols was long BABA.
