Just a month after Yahoo’s board of directors summarily kicked CEO Carol Bartz to the curb, rumors are swirling that the once-mighty Internet company is gearing up for a sale. Reports have Yahoo engaging Goldman Sachs and Allen & Company to do due diligence and gather financial information together in preparation, and Reuters has reported Microsoft is already circling—although Bloomberg refutes it.
Yahoo has been struggling since Microsoft’s protracted $45-billion hostile takeover sideswipe back in 2008, with the company today valued at something like $18 billion. There’s no denying that the company has lost a lot of its luster. Who would be interested in buying Yahoo today—and, more importantly, why might they think it was a good move?
Yahoo’s strengths
Yahoo may not be the Internet titan that it once was, but it still has a number of popular services and significant momentum amongst Internet users. Back in the day — before there were search engines — Yahoo was the de facto guide to the Internet: If you weren’t listed in Yahoo (and accurately) you really didn’t exist. While that role has largely been taken over by Google’s automated crawlers and search engines, Yahoo was able to leverage that early lead in Internet guidance into major footprints in a number of business. Yahoo is still a major Internet portal, even in an age when the idea of businesses built around “portals” seems incredibly passé. Yahoo serves as many Internet users’ home page, thanks to its strong stable of content offerings spanning news, entertainment, sports, video, and games.
Yahoo was one of the first companies to bring together the idea of pages with content customized to users’ interests, and it supplemented that idea with its own search engine (now powered behind the scenes my Microsoft’s Bing). Yahoo also runs one of the earliest successful forays into Web-based email (Yahoo Mail is second only to GMail in the U.S. market), and a host of ancillary sites and services that Yahoo acquired over the years. A notable gem in that bunch is the photo sharing service Flickr, which, despite some stagnation and the departure of its founders (they’re over at Glitch), remains the Internet’s premiere photo sharing community. It’s even thrived in an era seemingly dominated by YouTube. Yahoo Messenger also remains a strong IM platform, and the company has tried to stake out claims in the mobile services market.
All this translates to page views, and those views are the core of Yahoo’s business. Yahoo saw almost 900 million page views when news of Osama bin Laden’s death broke; similarly, the British Royal Wedding generated some 400 million page views in one day (PDF). Advertisers love numbers like that.
Although not all of Yahoo’s acquisitions have worked out well, a few of its investments have become very valuable, most notably its 40 percent stake in China’s Alibaba and a 35 percent stake in Yahoo Japan. The Alibaba Group is China’s ecommerce leader (operating Alibaba.com and Taobao), and Yahoo Japan is a wholly separate operating from Yahoo proper, despite bearing the same name. (For instance, Yahoo Japan uses Google for its search function.) The value of Yahoo’s investments in these companies has led some industry watchers to characterize Yahoo not as an Internet company so much as a holding company in Asian tech stocks: Yahoo’s stock in Alibaba is worth an estimated $9.4 billion, or nearly half of Yahoo’s total company value. The stake in Yahoo Japan might be worth as much as an additional $8 billion. If Yahoo could sell both stakes for top dollar, it could potentially pull in more cash than Yahoo itself is worth — on paper, anyway.
Yahoo’s weaknesses
Although Yahoo does offer some services for sale directly to consumers, most of Yahoo’s operating income stems from search and display advertising. And pretty much everyone in the online display advertising world is struggling against Google and Facebook. Yahoo’s search partnership with Microsoft is based on display advertising, and Yahoo did see its display ad revenue increase two percent last quarter to $514 million, even as the company’s overall revenue saw a 23 percent decline from the same quarter a year ago.
Overall, Yahoo earned $1.23 billion last quarter, and attributes the revenue decrease largely to accounting changes related to its search agreement and revenue sharing with Microsoft, along with one-time charges like spinning off HotJobs. Without those changes, Yahoo says it revenue would only have been down 9 percent. Nonetheless, the message is clear: Yahoo might run a number of top traffic sites, but Yahoo’s services aren’t very “sticky” — they don’t keep users around to view more ads. And despite efforts to integrate social services into its offerings, Yahoo has failed to gain traction against Facebook and social media services as as a first stop for many Internet users as they go online.
Former CEO Carol Bartz was working to trim Yahoo’s costs and improve its sales organization to increase revenue from ad sales, but those efforts had not had a positive impact on Yahoo’s stock price, Yahoo’s investors and board clearly weren’t willing to wait for results. Bartz believed that Yahoo’s search deal with Microsoft would only pay off in the long term: If she was right, the relationship should start bearing fruit in the next few quarters, as Microsoft has just about paid down its $150 million cap in transition cost reimbursements.
Despite all this, it’s important to note Yahoo is still making money — that’s more than can be said for some Internet giants.
Who would want Yahoo?
The first, obvious choice as a Yahoo suitor is Microsoft. The company famously launched a $45 billion hostile takeover offer for Yahoo back in 2008, and currently has a long-term deal with Yahoo to provide search results for Yahoo sites in exchange for a portion of Yahoo’s ad revenue. Recent reports have Microsoft considering making an offer on Yahoo, but at least at the moment, it just doesn’t make much sense. Microsoft’s primary interest in Yahoo back in 2008 was advertising, and making its not-yet-launched Bing search engine a major player in Internet search from.
The situation has changed considerably, in particularly because Microsoft’s search deal with Yahoo has converted Bing into the number-two search engine in the U.S. market. (It’s still far behind Google, but number two is better than number five, as AOL can attest.) Moreover, Microsoft’s search deal with Yahoo enables the company to reap many of the rewards that would have come with acquiring Yahoo, but pay less of a price. Let’s face it: Microsoft wasn’t interested in massive portions of Yahoo’s existing businesses like Yahoo Mail, Yahoo Messenger, mobile search and mobile apps, or even Flickr: Microsoft wanted Yahoo’s sites, content partnerships, and Internet page views. With the search partnership, it gets a lot of that without having to be the bad guy by rebranding and eventually shuttering many of Yahoo’s signature services. It’s pretty easy to argue the Microsoft-Yahoo search partnership favors Microsoft more than Yahoo.
Are there other suitors? Alibaba‘s Jack Ma initially indicated he might be “very interested” in buying up Yahoo—remember, Yahoo isn’t just a major presence in the U.S. market, but also operates numerous top sites in Europe and the Asia-Pacific markets. However, Ma’s initial enthusiasm for Yahoo has apparently been quelled by U.S. investment regulation. Any Alibaba acquisition of Yahoo would have to survive a lengthy and rigorous government review, and it undoubtedly be a political hot potato. Relations between the U.S. and China have been strained in recent years over censorship and human rights issues, and Chinese companies like Hauwei have been repeatedly dissuaded from making major investments in U.S. companies over allegations it is in league with the Chinese government. Although it’s hard to see how a Yahoo acquisition would impact U.S. national security, much political hay could be made of Chinese authorities tapping into U.S. Internet users’ search and browsing behaviors. Ma also might face skepticism from Yahoo’s board: Alibaba’s spinoff of Alipay into a separate, Chinese-owned company was a huge point of contention between Yahoo and Alibaba. The dispute took months to work out, and may have been a contributing factor in the Yahoo board’s dissatisfaction with Bartz.
AOL has repeatedly indicated it’s interested in a tie-up with Yahoo: AOL is working to rebuild itself as an Internet content and advertising firm, and — as a media company — Yahoo’s pageviews and infrastructure must be very attractive. However, Yahoo has repeatedly indicated it has no interest in a partnership or merger with AOL. Even if it were, it’s not clear where AOL would get the cash to fund such a move, although the company has apparently talked to bankers about ways to fund a deal. But rumors of AOL’s interest persist.
Other potential suitors include private equity firms like Silver Lake and Andreessen Horowitz, either acting alone or (more likely) in a coalition. However, a purchase by private equity firms will almost certainly mean the end of Yahoo as we know it: They would most likely sell off as many pieces of Yahoo’s existing business as they could, along with Yahoo’s Asian investments, then reform Yahoo as a much smaller online media company focused around a core set of properties. Unfortunately, it’s not clear where that smaller, focussed media company could succeed in the same arena where AOL is struggling.
Other names that have come up in regard to Yahoo: Disney and News Corp. The latter might still be stinging from the bath it took on MySpace (bought in 2005 for $580 million, sold this year for $35 million), but if there’s one business News Corp understands, it’s media. However, News Corp has been struggling to adapt newspapers to the Internet: Although the Wall Street Journal seems to be getting along fine behind a paywall, it’s not clear that publications like the London Times are faring so well — and Yahoo’s pageviews are all about free access to content, rather than subscription-based access. CNN seems to think Disney might be in the mix in the wake of Yahoo’s just-announced partnership with ABC News, arguing that a traditional media company might have better luck with Yahoo than tech firms. However, traditional media companies are better known for their struggles to adapt to the Internet, not their ability to lead the market.
Possibilities
Yahoo’s interest in a sale is all about maximizing value for investors, which have seen the company’s value falter from a market value of over $140 billion at the height of the original dot-com boom in 2000 to just $18 billion today. Admittedly, not all Yahoo’s current investors have been along for that entire ride, but the company’s current leaders are undoubtedly frustrated after the tenure of Carol Bartz: Yahoo’s stock mostly lay stagnant since she came on board in January 2009. Yahoo’s decision to look at the possibility of a sale — apparently as a higher priority than seeking a new CEO — means the company wants to know where it stands. Will investors be better off if the company stays the course, or if it sells?
A sale of Yahoo would most likely break up the company. Virtually no major players in the Internet industry are interested in all of Yahoo’s operations. For traditional investment firms, most of Yahoo’s value is in its Alibaba and Yahoo Japan stakes; for media companies, Yahoo’s value is in pageviews and audience reach, particularly in its news, entertainment, finance, and sports offerings. It would be harder to find a buyer for businesses Yahoo built from its days as a tech company, like Yahoo Mail, Yahoo Messenger, and Flickr. While those could potentially be spun out into separate, sustainable businesses, they aren’t going to bring enough money to satiate investors or turn Yahoo around — and that may mean dark days for the things that bring many long-term Yahoo users back time and time again.
