Yahoo (YHOO) board members will meet this week to discuss what every Yahoo stock investor has always dreamed of: selling its core business.
Over the past couple years, YHOO stock has been valuable due to lucrative stakes in Alibaba Group Holding Ltd (BABA) and Yahoo! Japan. Combining the value of its stakes in both companies leaves Yahoo stock investors valuing the company’s core business at less than $0.
Of course, the business isn’t worth $0. It has $5.9 billion in cash and investments and $1.6 billion in property and equipment. (It also has $1.2 billion in debt on the balance sheet.)
And its web properties (not including Yahoo! Japan or Alibaba) see 1 billion monthly visitors from around the world. But with revenue and earnings headed in the wrong direction who would buy YHOO’s struggling core business?
Yahoo Stock Is Worth Less Than the Sum of Its Parts
Finding a buyer for Yahoo’s core business won’t be easy. The company’s search and display ad business continues to decline while investments in properties like Tumblr and Flurry Analytics have failed to produce anything meaningful.
The right buyer would have to be able to use some expertise (search, display ads, network building, analytics) to make the most out of YHOO’s audience of 1 billion-plus.
That makes the list of potential buyers pretty straightforward:
Alphabet (GOOG, GOOGL) might be interested in getting its hands on Yahoo’s display ad business and replacing it with its own more profitable ads from Google. Google already has a deal with YHOO to provide search ads for its search engine, paying Yahoo! a percentage of revenue. Google also runs a web analytics business and could benefit from Flurry’s mobile expertise.
Microsoft (MSFT) is another potential buyer. The company already provides search results for Yahoo!’s desktop search engine via Bing. A buyout deal would provide MSFT with more ammunition in its battle against Google, especially on mobile search.
Facebook (FB) could consider the core business in order to gain access to Tumblr and Yahoo’s news portal. Facebook has a proven track record of growing networks and has expertise in mobile advertising. Flurry analytics would fit well into its Parse SDK for mobile, and the news portal lends itself to Facebook’s push into news with Instant Articles. Yahoo’s core business also comes with a slew of talented engineers, many specialized in mobile development, who could benefit Facebook.
A Full-Scale Buyout Is the Better Deal
Any company interested in buying Yahoo’s core business, however, should be interested in buying out all of Yahoo stock — not just the core business.
As mentioned, Yahoo’s core business is currently valued at $0 after factoring out YHOO’s other holdings in BABA and Yahoo! Japan. Even after paying a premium, the buyer would be getting a deal on the core assets. All of the previously mentioned companies could afford to float the cost of buying the entire company.
The BABA stake could eventually be sold back to Alibaba, which would effectively act as a share buyback for BABA shareholders. Yahoo! Japan may be harder to liquidate as neither Yahoo! Japan nor Softbank (which owns 36% of the company) have expressed any interest in buying shares. Still, the value of these stakes would be accounted for in the acquiring company’s stock price just as they have been in Yahoo stock.
Buying the entire company also provides strategic value. If a company buys out Yahoo stockholders entirely, it gains key partnerships with big companies in China (BABA) and Japan (Softbank). Both Google and Facebook are locked out of China, and Jack Ma could prove a valuable ally in helping either break into the market. Microsoft, meanwhile, is falling behind in China while competitors like Apple (AAPL) have found great success in the market.
Facebook could also benefit from an improved presence in Japan, where it’s surprisingly not the most popular social network.
Bottom Line on Yahoo Stock
There are plenty of companies that would be happy to take Yahoo’s core business off of shareholders’ hands, but the question is how much would they pay. Buying the whole company will effectively cost less than buying the core business, and thus produce less value for Yahoo stock investors.
But finding a company to buy just the core business at a good price may be more difficult. Bigger tech companies — the ones that could benefit most from YHOO’s core business — are more likely looking to buy the whole company and deal with liquidating the excess assets later. It’s simply more efficient.
As of this writing, Adam Levy was long AAPL.