Yahoo! Inc. (YHOO) has floundered with the wrong hands at the helm, and that is likely leading not just to new leadership, but new ownership. In retrospect, it’s the least-expected way things could have panned out for once-great web company when it became clear something had to change — anything — roughly a year ago. But the end result is still the same.
Software giant Microsoft Corporation (MSFT) is reportedly backing a private equity effort to acquire Yahoo, or at least part of it. YHOO owners, of course, are thrilled to hear any good news.
The last few years have been loaded with denial, disappointing numbers and a deterioration of the Yahoo name as well as the value of YHOO stock, yet nothing seems to be happening from the inside to halt the implosion. A buyout offer may end up being a chance at a semi-graceful exit of what has become a very bad trade.
Nevertheless, the news raises questions, not the least of which are questions of how a Microsoft-sponsored private-equity acquisition would work, and why would Microsoft go that route rather than an outright buyout.
YHOO Going Private? Maybe.
The rumors surfaced in earnest this past week and early this week, though given the source — Reuters — they’re credible rumors.
The buzz is that multiple private equity firms (presumably as a group) have approached Microsoft as a potential lender to acquire Yahoo’s digital and advertising businesses. Their combined value is said to be worth between $6 billion and $8 billion, but the company is reportedly hoping for $10 billion.
Microsoft would only kick-in a small fraction of that total, more as a token than a meaningful investment, according to some sources familiar with the potential deal … a means of adding a major name as a pseudo-supporter of the idea.
A Not-So-Strange Arrangement
While in many regards Yahoo and Microsoft are rivals, in many other ways they’re partners. In 2009, the two companies struck a deal that made Microsoft’s search platform the backbone of Yahoo’s search results. It was a win-win deal, but the “win” for Microsoft is largely predicated on Yahoo’s survival.
While any other suitor — Verizon Communications Inc. (VZ) and Time Inc (TIME) have also been suggested as potential buyers — would still be obligated to fulfill existing agreements, they may view Microsoft in a different light at the end of the ten-year contract, or they may even do more damage to Yahoo as a business venture in the meantime. At least by partnering with private equity firms, Microsoft is more or less on the same side of the table as Yahoo’s would-be buyers.
That may be why Microsoft isn’t bothering with an all-out acquisition, as it was willing to make happen in 2008 with a $45 billion bid.
By working with the private equity firm that would acquire Yahoo and almost assuredly replace the entire board of directors and the company’s upper management, it can get a great deal of what it wants without a huge cash outlay.
Again, it may only care about getting through the next three years.
The lack of an outright offer for the company may also suggest Microsoft thinks Yahoo is too far gone to salvage now. That said, backing a private equity buyout may also be an overture to an outright buyout by Microsoft down the road.
Bottom Line for YHOO
Whichever way the saga unfurls, current and prospective YHOO shareholders should know that even if Microsoft doesn’t get involved in a deal to acquire Yahoo, big changes are on the way. The board of directors is about to be shaken up, and key personnel — including CEO Marissa Mayer — could find themselves on the chopping block.
Yes, hedge fund Starboard Value is leading that charge. Starboard CEO Jeffrey Smith recently penned a letter to YHOO shareholders saying he “cannot envision a scenario where the shareholders of Yahoo would entrust the current management team and Board.” He then vowed to do what he could to replace all nine board members.
And it’s not like this is a new premise, nor does Smith lack support for his plans.
Whatever the case, current owners of Yahoo stock would be well advised to take any decent buyout offer they get from here. The next several quarters could be messy if a proxy war is allowed to fester in lieu of an outright acquisition of Yahoo’s core business.
The irony?
YHOO could have regained all of the value it had lost since late-2014 and continued to move forward had the company been willing to do many of the things these private equity firms likely plan on doing from here. But, the company’s management team and board were too stubborn to effect those changes on their own.
In that light, some sort of sweeping buyout and overhaul was inevitable. Too bad so many investors could miss out on the bulk of the turnaround.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
