Yahoo: From Bartz to Sum of the Parts

SEPTEMBER 8, 2011   THE WALL STREET JOURNAL

By MARTIN PEERS

If ever there was a moment when investment bankers could prove their value to society, or at least to the business world, this is it.

Yahoo's overdue firing of Carol Bartz as chief executive, without a successor in place, puts Yahoo even more firmly in play. Co-founder Jerry Yang might believe Yahoo is "not for sale" — as AllThingsD reported he told some employees on Wednesday — but he only owns 3.6% of the stock.

Reuters

Carol Bartz

The board's initiation of a "comprehensive strategic review" suggests it is open to ideas from outsiders.

The only question is whether given all the complexities involved, anyone is likely to be interested. After all, speculation of private equity firms or media companies contemplating a move on Yahoo have swirled over the past 12 months, with nothing concrete emerging.

And even at its current depressed price, buying Yahoo requires writing a hefty check. The company has an enterprise value of about $14.5 billion — more than a private equity firm or most media companies would likely want to spend.

Of course, a big chunk of Yahoo's value is tied up in its Asian assets: a 40% stake in Chinese e-commerce firm Alibaba Group and 35% of Yahoo Japan. The big snag is that selling those likely would involve big tax hits and, in the case of Alibaba, would mean giving up an asset of immense strategic value. Yahoo has been looking for months at ways of unwinding the Yahoo Japan stake tax-effectively, so far without success.

It's time to break the stalemate. Certainly the business can't afford another protracted period of drifting. Second-quarter results showed a serious deceleration in Yahoo's display advertising revenue growth rate, while the search alliance with Microsoft hasn't produced the results expected of it.

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Bloomberg News

Yahoo should start the process of tax-effectively selling the Asian assets in order to smooth the way for a sale of the core business. After all, the Alibaba stake at least likely will get sold as a result of any deal: A change in control of Yahoo could trigger a right for Alibaba's other shareholders to buy back Yahoo's stake in the company. And tax expert Robert Willens says that while there are tax-effective structures that can be utilized, such deals need to be done before an overall sale of Yahoo is seriously discussed.

The big problem is realizing the best possible price for the assets, particularly if Yahoo is a clear seller and potential buyers limited.

Even though that's not a great negotiating position, there is an opportunity for Yahoo investors. Jefferies & Co, for instance, estimates Yahoo's sum-of-the parts is worth $19 to $20, at least 40% above its current price. That math has long been tempting. But as Yahoo's tepid stock reaction Wednesday indicated, shareholders have learned Yahoo won't necessarily find the right answer.