It had seemed that this board of directors was terminally stuck in limbo with respect to deciding what to do next.
Yahoo! longs wanted to see a full sale of the company or the pursuit of a cash-rich split. Yet, all the latest indications were the board was focused on doing some unnecessary minority sale to a PE firm that would dilute existing holders, or, in the case of
, about a sudden new focus on hiring magical unicorn CEOs (that didn't seem so magical to me).
However, Yahoo! longs -- according to
The New York Times
report -- can thank
and Yahoo!'s largest shareholder
(led by the widely respected Gordy Crawford) for telling that board that they had to do better.
Today, the board will reportedly decide whether they want to accept a sweetened "cash-rich split" offer from Alibaba Group and
or face a hostile bid for the whole company by them. It's hard to imagine the board would opt for the hostile bid path. But one thing I've learned as a long-suffering Yahoo! Long, waiting for the board to decide, is that you can't predict crazy.
Let's assume they bless the transaction, what's next?
We know that Yahoo! was an $18 billion company yesterday and doing this "cash-rich split" would allow them to dispose of what they deem to be non-core assets for a valuation of around . . . $17 billion. This means the infinitely wise market was valuing Yahoo!'s core business at -$2 billion (after subtracting out the cash on their balance sheet).
After the transaction -- per the
report -- Yahoo! will have $5 billion cash from Softbank for the Yahoo! Japan stake, $7.5 billion cash from Alibaba Group in exchange for the majority of their 40% stake in Alibaba Group, a remaining 15% stake in Alibaba Group that this transaction values at $4.5 billion, $2.4 billion of cash on their balance sheet, and the Yahoo! "core business."
What's more, in order to do this "cash-rich split" in a tax-efficient manner, "other assets" will have to be dropped into Yahoo!'s core business. I assume those assets will be part of the price Softbank and Alibaba Group will pay, so some of the cash listed above might decrease slightly. But the market might get a little bit more excited about Yahoo!'s core business depending on what those "other assets" would be. For example, what if it were Hulu or the Weather Channel or something else?
So, net of the transaction, according to these numbers, Yahoo! would consist of: (1) Yahoo!'s core business including some new "other assets" and about $15 billion in cash.
What is the core business worth?
It's doing about $1.5 billion in EBITDA today.
is currently valued at four times trailing EBITDA. That means "core" Yahoo! is worth $6 billion or $5/share (or closer to $21/share in today's pricing). Third Point said clearly in September that Yahoo! is certainly better run with better assets than AOL and that a "fair" valuation (before a takeover premium by, say, a
) is seven times EBITDA, equal to $10.5 billion, or $8.50/share (or closer to $24.50/share in today's pricing).
Why isn't the stock moving higher already? Investors want to see the Yahoo! board approve the deal and see that things are moving forward. I would expect a re-rating of Yahoo! shares over the next month or so, assuming the board stays on the appropriate flight path.
Going forward, this transaction makes Yahoo! "core" more attractive for a buyer like Microsoft.
For those people (usually not Yahoo! longs themselves) complaining that Yahoo! is getting rid of their most valuable asset, consider:
Weren't you the same people complaining in the spring that Yahoo!'s Alibaba stake was now worth zero because Jack Ma (who's now going to be paying $12 billion) was going to steal it?
They're still keeping 15% in Alibaba Group, which is fair and offers considerable upside.
Every asset should be monetized at the right price. This price is fair. Ma's prior offers were not.
Let's see what the board decides at the meeting today.
At the time of publication, Eric Jackson was long YHOO.
Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.
Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.
He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.
You can contact Eric by emailing him at email@example.com.