Buying Yahoo! for 50%

NEW YORK ( TheStreet) -- You may not know it, but Yahoo!'s ( YHOO) biggest asset isn't www.yahoo.com, its most valuable asset is www.alibaba.com.

Yahoo! owns a sizable chunk of Alibaba. We can only guess what Alibaba's valuation is, but anyone's opinion is probably as reliable as the next.

What we do know is if you incorporate the common and preferred shares, Yahoo! owns about 24% of Alibaba. The lowest respected estimates place Alibaba near $50 billion, and the highest I've read approaches $130 billion. As we know from Facebook ( FB), anything can happen when a company goes public.

Here's where things truly get attractive. Break out the calculator and let's do a little math magic and see if we find some hidden value under the hood.

To begin, let's assume for a moment that Alibaba is worth near the high end of the estimates and call it even $100 billion (overly optimistic in my "never drink the Kool-aid" world, but it's a starting point).

If Alibaba is worth $100 billion, Yahoo!'s share is worth give or take about $24 billion. Yahoo!'s current market cap is about $30 billion, leaving a $6 billion valuation for all other Yahoo! assets. If you remove $2 billion in cash, we are left with a price tag of $4 billion for everything remaining. By now you may see where I'm going with this.

For every Yahoo! share you buy, about $3.70 is for the Web properties under Yahoo!'s control, and the remaining $24 in valuation is for cash on hand and Alibaba. Of course, that only works on paper and the market is a discounting mechanism, so let's postulate we're overly optimistic about Alibaba and reduce its value for Yahoo!. We should also discount cash based on some of Marissa Mayer's purchases failing to generate income. At the rate she is buying technology companies, it's not unreasonable to believe at least one will fail.

After removing cash and Alibaba, we can almost double the remaining price component paid for Yahoo!'s Web assets from $3.70 to $7. At $7, all else being equal, we can buy Yahoo! fully discounted and free after removing Alibaba and cash. Perhaps through a strategy utilizing dividends and options we can arrive at our desired destination.

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