Yahoo: Throwing in the Towel?

BOTTOM LINE The Wall Street Journal has reported that Yahoo39s Board quotis expected to discuss whether to proceed with a plan to spin off its Alibaba stake find a buyer for Yahoo39s core businessor bothquot This follows the delivery of a letter from investor Starboard Value expressing a preference that Yahoo pursue a sale of the core business two weeks ago We would similarly view a sale in a positive light if one could be realizedThe potential for Yahoo selling its core business is now likely to receive more attention from investors following efforts from activists and a new report in the Wall Street Journal that Yahoo39s board is considering this possibility Realizing value is far from assured however Yahoo39s core business is in seemingly permanent decline on a likeforlike basis with growth salvaged over the longrun in our model by the use of free cash flow to buy revenue through acquisitions As it stands Yahoo can remain a large player in search without external acquisitions but anything other than 1 may be a weak position Growth will not necessarily match industry levels because there are real efficiencies in concentrating search budgets with Google As well most small advertisers will only buy search from one provider concentrating budgets with Google alone Further there is a risk that other companies amp8211 such as Facebook amp8211 establish their own search business and quickly take share of the market And then there is the shifting nature of the market of paid search advertising where the dominant spenders both small businesses and ecommerce advertisers alike are increasingly flexible as to whether or not they are buying search or nonsearch inventoryMeanwhile in display Yahoo suffers because likeforlike display advertising has faced and will continue to face deflationary conditions Yahoo is hit hard because it historically was able to generate high pricing for its inventory This was true because Yahoo offered and still offers relatively good targeting and efficiently aggregated audiences However in a programmatic era efficient audience aggregation is not unique to Yahoo To some degree Yahoo can retain quotshare of walletquot by adding more video inventory to its mix of ad units as video units typically command higher prices vs display but this opportunity may be limited as every other publisher adds more and more video inventory to their properties Otherwise ongoing investment in content may help but strategic and executional choices probably need to be changed and or improvedThe saving grace for Yahoo is that it still has a relatively large user base that is reliant on the platform so long as they maintain email addresses there It also has a stillrelatively strong and stillrelatively large sales force As long as both of those factors remain in place there would be time for an acquirer to establish new strategies and develop products while the property continues to generate cash flow These elements provide support for a range of potential acquirers who could come from the telco world as we saw with Verizon buying AOL the datamarketing services world as we saw with ADS buying Conversant or from more traditional internet and media subsectors The big question is whether anyone would actually show up with a meaningful bid We can understand why a buyer looking to attach their existing assets to a large media property might look at Yahoo only reluctantly vs alternative strategies We can also imagine that there would be private equity buyers amp8211 or individuals with private equity backing and different ideas as to how to turn the business around or different executional capabilities amp8211 who would come up with realistic bids if strategic buyers did notOverall we place a value on Yahoo39s core business of 19bn not counting the 58bn in cash we expect Yahoo to have on its balance sheet at yearend 2016 including an assumption of midsingle digit topline growth and stable mid30s adjusted EBITDA margins post 2016 supported by 1bn in annual capex and MampampA We assume only 2 longterm growth the lowest among companies we cover and a 15 longterm discount rate the highest among companies we cover Of course there are a range of other scenarios that might be as plausible such as lower margins and lower growth or decline but less MampampA that produces the same valuation Whatever the right assumptions the low absolute price we assign to the business suggests that a sale process would have a high probability of causing core Yahoo to produce higher value for shareholders than it presently does todayVALUATION We value Yahoo with its core business worth 3share and cash less debt worth nearly 5 We value the Alibaba and Yahoo Japan assets at 29share presentlyRISKS 1 Ongoing erosion in the core business 2 Unfavorable outcome from monetizing stakes in Alibaba and Yahoo Japan and 3 Uncertainty about new managementFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE YHOO 12215pdfThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers

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Yahoo: Throwing in the Towel?

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Brian Wieser

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