Just when it looked like Yahoo! Inc. (YHOO) might finally be bringing a welcome end to its miserable tale (by virtue of the sale of its core business) an eleventh-hour sucker punch sent YHOO stock down another 4% this morning.
As it turns out, Yahoo’s core business may be sold for as little as $2 billion … a country mile in the wrong direction from relatively recent estimates that the company’s internet operation could fetch as much as $10 billion in the open market.
Then again, owners of YHOO stock may not want to sweat that possibility too much. Odds are good if the best bid is closer to $2 billion than $10 billion, it’ll walk away from the negotiation table and move on to plan B.
The Wall Street Journal was the first to float the idea late Thursday night. Citing people familiar with the matter, the WSJ said the bidding war’s frontrunner, Verizon Communications Inc. (VZ), along with the remaining contenders, may only bid between $2 billion and $3 billion to purchase Yahoo’s struggling internet and search businesses.
The sale process officially began in late March, following pressure from many directions, but mostly from major shareholder and activist investor group Starboard Value LP. The first round of bidding presumably drew many bidders, but only a handful of would-be buyers have stuck around.
One of them is the aforementioned Verizon, but private equity firm TPG and a couple of other consortiums are also said to remain in the running. But a mere $2 billion for a once-great internet powerhouse that still turns heads, even in its unhealthy state?
Mathematically Speaking, YHOO Stock Is …
Actually, it cannot be too shocking. Mathematically, Yahoo’s core business has been valued at less than zero or barely above zero for months now, when subtracting the presumed market value of its stake in Alibaba Group Holding Ltd (BABA) and Yahoo Japan from the total market cap of YHOO stock.
As shareholders as well as suitors are about to find out though, the sum of the company’s current parts may hold more value when they’re stand-alone units.
To be fair, Yahoo’s display and search businesses are in rough shape. Buying its core operation is tantamount to buying a leaky boat, making it arguably worth nothing from a certain perspective. That’s not how the market works though.
As is the case with thousands of other companies, suitors can and should value Yahoo’s core business for what it could be in the right hands rather than what it is right now, in the wrong hands.
Yahoo doesn’t offer income details for its different divisions; however, it does report divisional revenue details. And last quarter, its search and display businesses generated $955 million worth of revenue. Over the course of the last four quarters, display and search has generated $4.1 billion worth of revenue.
Assuming a relatively typical price-to-sales ratio of 1.62, one could argue that Yahoo’s core business is worth something closer to $6.6 billion.
Granted, Yahoo stock and its business is anything but typical. Its buyer is taking on a project, and its profit picture is unclear.
Even so, many observers feel that its core operation remains profitable, even if its numbers are shrinking. Cowen’s head of internet industry research John Blackledge, for instance, believes the company’s display and search businesses could jointly drive a respectable $780 million worth of operating profits this year, proving it — turning a profit — can be done.
Conservatively assuming a price-to-earnings multiple of only 10, that estimate suggests Yahoo’s core units should fetch something on the order of $8 billion.
The trick will simply be convincing a buyer that it can reverse the downtrend of the company’s search and display numbers. That shouldn’t be a terribly tough sell, though.
Bottom Line for Yahoo Stock
If the top bid for Yahoo’s core business does end up rolling in no better than the $3 billion-ish area, owners of YHOO stock need not worry.
It’s unlikely the company would sell those assets at that price simply because the board and most of the major shareholders would agree that figure simply undervalues the potential of the company’s search and display units.
At that point, though, the proverbial plan B becomes a serious shakeup of the company’s leadership, just to inject some new ideas into the mix … perhaps ideas that don’t lean heavily on expensive but ultimately fruitless accusations. That shakeup will most likely include the ousting of CEO Marissa Mayer, as Starboard Value will be doing most of the pushing and pulling of any turnaround efforts in the event the company’s core isn’t sold.
Neither is worse than doing nothing though.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
