If the rumors are true — and there’s likely to be at least some truth to them — then Yahoo! Inc. (YHOO) CEO Marissa Mayer, the company’s board of directors and owners of YHOO stock aren’t apt to be terribly happy today.
The second round of bidding for the internet company’s core business has reportedly drawn an insulting offer from presumed frontrunner Verizon Communications Inc. (VZ), re-opening the possibility that the telecom company may not end up owning the prize.
Instead, Yahoo’s core holdings could still end up going to a third party that may or may not rekindle Yahoo’s glory days.
The good news is, the board and YHOO shareholders have a rumored offer they’ll probably be willing to walk away from, opting to rebuild on its own rather than let someone else pick up the broken pieces.
Did Verizon Lowball Yahoo?
It may or may not actually be the best offer submitted in the second round of the bidding process, but it is the only offer with a specific number “unnamed sources” were willing to offer … Verizon has reportedly bid $3 billion for Yahoo’s internet businesses.
Yes, it’s a far cry from the figures approaching $10 billion being batted around just a couple months ago.
Some will argue that, mathematically, Yahoo’s core business is worth nothing, as its current market capitalization minus the value of its stake in Alibaba Group Holding Ltd (BABA) still technically results in a negative number.
That line of thinking, however, was always shortsighted, presuming traders would continue to see Yahoo’s core as not only worthless, but perpetually hopeless. Standing on its own, the price of YHOO would/should at least reflect the fact that Yahoo’s core business is still generating something on the order of $4 billion in revenue per year. Last quarter, traffic-driven sales (mavens, non-mavens, mobile, desktop and all combinations) generated $1.034 billion in sales.
The number is shrinking, to be clear, and that deterioration should be of concern to a would-be buyer. The average price-sales ratio for large-cap stocks is above 2, though, implying that even a struggling Yahoo is worth something on the order of $8 billion.
What’s less clear is the profitability of Yahoo’s internet business; the company doesn’t break out those details in its quarterly statements. Then again, Yahoo’s internet asset profitability may be the less-concerning detail to a suitor. That can be fixed more readily than revenue can. And, in the right hands, the revenue trend would likely take a turn for the better in relatively short order.
So why such a lowball offer? Arguably for the same reason anyone makes a lowball offer — Verizon’s got nothing to lose, and it knows Yahoo may be just desperate enough to take the lousy offer.
Bottom Line for Yahoo (YHOO) Stock
Just in the interest of disclosure, yes, I was the same guy who back in March suggested that YHOO shareholders, the board of directors, and Mayer be willing to take whatever offer was extended to them.
While I still contend the company and its stakeholders may not want to play hard to get, that free advice was based on the notion that bids would be closer to $10 billion rather than $3 billion. For a mere $3 billion, the company may as well tell all the bidders “thanks but no thanks” and go back to the turnaround drawing board and see what it can do on its own.
Of course, such a move would require the exit of CEO Marissa Mayer, if not others.
It’s easy to blame the person sitting at the top of the leadership chain for a company’s failures, even when it’s not his or her fault. In this case, though, it’s clear Mayer never really clicked with Yahoo, and therefore Yahoo never really clicked with consumers. At the same time, the constant replacement of top executives didn’t help Yahoo find a firm footing. That’s a reflection of her people skills (or lack thereof).
In other words, any homegrown rebuilding effort should start with her exit, which was apt to happen anyway if a suitor were to acquire the company.
Whatever the case, $3 billion is an inadequate offer, not that it doesn’t reflect where Yahoo is right now, but it doesn’t reflect where Yahoo could be in three years time with the right tweaks put in place.
Hopefully, for their sake, shareholders pass on the Verizon offer, and/or get a better one from one of the remaining suitors. Verizon is simply throwing spaghetti on the wall … a surprising disappointment.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.