Yahoo! 'Growth Plan' Offers No Shareholder Comfort

NEW YORK ( TheStreet) -- Yahoo! ( YHOO) CEO Jerry Yang should focus on identifying buyers that will pay a premium for the company's parts and are better equipped to cut loose the company's cumbersome corporate structure rather than a vague management "growth" plan, analysts argue.

Investors haven't seen the full value of Yahoo's bundle of Asian businesses, which include stakes Asian assets like Yahoo! Japan and Alibaba. The most recent valuation of Yahoo! Japan, a 35% Yahoo!-owned company, was tagged at nearly $6.65 billion. A 40% stake in Alibaba, the Chinese ecommerce company, could fetch a value of roughly $12 billion.
Yahoo co-founder Jerry Yang.

In a sale, those assets could net the company nearly $13 billion after taxes. Taken with its $2.6 billion in cash and short term investments, Yahoo's core search and display business, which has faltered in the face of competitive pressure from the likes of Google ( GOOG) and Facebook, is valued by analysts at between $5 billion to $8 billion.

The company has an overall market cap of roughly $20 billion, meaning the sum of each asset value may be below the company's overall market value.

In September, co-founders Yang and David Filo and Chairman Roy Bostock wrote to a letter to employees explaining that the company had hired advisers to do a strategic review to enhance the value of Yahoo for its stakeholders. "What Yahoo! needs to do better -- and we've talked about this -- is accelerate innovation, reignite inspiration, and give our users what they want now -- great content that is engaging and easy-to-use on any device and provides an experience in which they can participate and contribute. Perhaps most importantly, we need to anticipate what they will want next. That is the path to enhancing the value of Yahoo! for all of its stakeholders," the letter said.

The letter came amid a flurry of speculation ranging from an AOL ( AOL) purchase, a spin of Asian assets or an outright sale -and it fanned more speculation. Since confirmation of Yahoo!'s strategic review surfaced, Alibaba's Jack Ma and Alibaba the company, DST Global, Silver Lake Partners and Microsoft ( MSFT) have all been rumored to be interested in a full-fledged takeover.

The problem for Yahoo! is that there is a big difference in the plan Yang, Filo and Bostock expressed to employees -- reinvigorating the core search and display business -- and what analysts think is in the best interests of shareholders, who've been burned in the past by the board's decision to decline repeated bids by Microsoft's, including a $31 a share offer.

"We conclude that Yahoo is unable to find a strategy to drive revenue growth and please public shareholders," said Clayton Moran an analyst with The Benchmark Company in a Monday email to TheStreet. He added, "The best thing for Yahoo would be a sale of the company given that there is still material asset value in the Asian investments and the domestic brand."

The idea is other companies see more value in Yahoo! and its shares than whatever management can do to grow the underlying businesses. "A full takeover by a strategic buyer like Microsoft would likely bring the highest premium. It would certainly be the cleanest exit. Selling the Asian assets has proven a difficult and complicated process," said Moran.

An acquirer like Microsoft could actually integrate Yahoo!'s search and display business in a way that best adds profitability to the existing brand.

For instance, Microsoft, which reimburses Yahoo! for revenue that its websites generate, might pay a premium to take control its websites and ad revenue. Herman Leung, an analyst at Susquehanna Investment Group thinks a Microsoft acquisition is most likely and best for Yahoo shareholders.

In a Monday phone interview with TheStreet Leung said by buying Yahoo!, "What Microsoft would get is more efficiency on their display and search business. For every dollar Yahoo generates on their Microsoft search, they pay them back 88 cents." Traditional media companies like Disney ( DIS)or News Corp ( NWSA) might also be interested in paying a premium for Yahoo's digital presence, according to Leung.

Leung also points to Alibaba as a buyer that will bring a premium takeover price because of Yahoo's 40% stake in the company, which owns Alibaba.com, TaoBao, AliCloud and a payments arm AliPay --all needing approval from Yahoo's board to expand into international markets like the U.S., U.K. and Korea.

In the past year, Jack Ma, the founder of Alibaba, has publicly conveyed the sometimes problematic nature of his partnership arrangement with Yahoo!, as well as his desire to take back Yahoo's stake.

In recent weeks, reports surfaced that Alibaba's Ma may raise funds personally or through his company to buy Yahoo! In an Oct. 3rd research note after Ma expressed his interest in September, Leung wrote, "Bottom line, while LBO is complex and less likely, we see corporates making a run at Yahoo! more likely (Alibaba Group, Microsoft, traditional media)."

About the best strategic alternative for Yahoo to undertake and a realistic price that it can fetch, "I think the best return is to just sell the whole entire thing and just forget about all of these moving pieces. The buyer can extrapolate the value their Asian assets over time... If you get a price with a two handle a price of $20 a share or more it's a success," said Leung. It's a recognition that even if seperate asset disposals would draw out the most value in Yahoo's assets, an acquirer of the whole company may be better equipped to do so -- and would pay a premium.

Yahoo declined to comment on speculation about the results of its strategic review. Though rumored buyers are emerging from the weeds in an almost daily basis, the company said in its letter to employees, "This process will take time. Months, not weeks."

The key to maximizing the value of the company for shareholders, still smarting over the failed Microsoft takeover, is for Yahoo management to stop trying to grow the core business. When Yahoo's board rejected Microsoft's more than $40 billion bid, they said in a statement, "The board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects." Since the bid, Yahoo's brand and platform have declined in growth under current management, in part because of the Great Recession. According to data compiled by Bloomberg, Yahoo's annual revenue has fallen at a 6.2% compounded rate in the last two years.

Calling the spurned bid a "fiasco," Martin Pyykkonen an internet analyst at Wedge Partners said in a Monday phone interview with TheStreet, "What Microsoft would have gotten is a massive sinkhole." He believes that Yahoo's core business may not be undervalued, "I think with Yahoo's core search and display business, does this have a meaningful market value and a growth outlook? I think they would be challenged to show that as a standalone company," said Pyykkonen. He believes that the company should split its Asian assets from its search assets in separate sales.

Even then, Yang and company will need to be dispassionate about the business they birthed. If Alibaba and Yahoo Japan were to get premium prices in a sale separate of the core search and display businesses, it would be concrete evidence that investors currently see the business as insignificant within the current company structure. "If you're Jerry Yang and sitting there, a sale of Asian assets may prove gee no one wants what I started... if I sell my Asia Pacific assets am I shortchanging myself?," asked Pyykkonen.

For Yahoo shareholders, it may be that the best conclusion of the Board's strategic review is the abandonment of their years of bullishness on the core Yahoo business -and the tone of their letter to employees. Without such a strong belief in growing the core business to increase shareholder value, Yahoo's stretegic review may actually extract value by finding capable outside hands that have inroads to stronger growth opportunities.

-- Written by Antoine Gara in New York

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