The trouble with Yahoo!’s M&A scuttlebutt
General
Looking at Yahoo! itself first of all you have a board that can’t or mostly likely won’t stand up to a strong but non-performing CEO in Carol Bartz. If you look at the likes of Hewlett-Packard and the trials that they went through getting rid of Fiorina and Hurd, combined with shareholders that won’t be placated no matter what they do; doing nothing looks like a good strategy. Given the staff exodus from Yahoo! there probably isn’t a viable interim CEO candidate if Bartz disappeared in the morning.
From Bartz’ point-of-view there is the knowledge that a takeover is likely to leave her out-of-pocket. Research by Dow Jones Investment Banker and Shareholder Value Advisors supports that hypothesis. Generally whilst a CEO may gain only part of the return from share options as they would have a loss on the time value of at least some of them. Secondly they would then lose on future earnings which wouldn’t be fully compensated by bonuses or a golden parachute.
Finally, you have her well-documented ego to contend with, going out like that would make her look like a failure. She doesn’t seem to be prepared to man-up and take responsibility for the company’s current failings, believing that given enough time she can turn things around. But then so did Nick Leeson and look what happened to Barings.
Structure
Yahoo! is currently priced at an extremely high P/E ratio of 26.64 (in comparison Sina.com: 6.97, Microsoft: 12.16, eBay: 13.50, Google 26.12 – source Yahoo! Finance). So you could argue that Yahoo! should be roughly a third of the price of the price it is now.
Part of the reason why it isn’t is a fantastic financial judo move that Jerry Yang was involved with a number of years ago. Yang gave Yahoo! China to Alibaba in return for 40 per cent of their shares and a seat on the board. Move forward to 2010 and this is one of the few bright spots for Yahoo! shareholders to look forward too, if Alibaba does the IPO everyone thinks it will. Alibaba however now realise that they acquired a pup with Yahoo! and no longer even have their own search technology. They are keen to throw Yahoo! shareholders overboard.
Things aren’t great at Yahoo! Japan either where Yahoo! Inc is a minority shareholder. Yahoo! Japan chose to go with Google rather than Microsoft on search and presumably would breakaway if the chance arose. The Japanese government is deeply invested in the future of Yahoo! Japan as it is one of the few technology success stories within the country and has its home in some of the best business real estate in downtown Tokyo.
One market that hasn’t been discussed in the media, but could be deceptively complex is Australia. Both the major portals MSN and Yahoo! are actually 50:50 joint ventures with local media companies PBL Media and Seven Media Group respectively. These groups are vertically integrated with television networks, newspapers and mobile content so Australian scrutiny and sensitivity is likely to be high.
AOL
Yahoo! buying AOL would use up pretty much all of their cash-in-hand. Whilst there would be some synergies, there would also be complications like AOL’s search deal to unwind. Secondly, AOL is undergoing a radical restructure which would prove a distraction to Yahoo!’s non-performing management team.
Going the other way, AOL would have to jump through hoops to sort out the financing for a deal and would have to partner with Alibaba and possibly Softbank to unwind the big pieces in the complex ownership of Yahoo! in Asia. Once the deal was done you would still have a heavily leveraged business that would need to be radically re-engineered. Against that you would have contradicting search deals and general chaos and mayhem that Microsoft would be kicking out because they could.
Microsoft
Although there have been unsourced claims in the media that Microsoft is alarmed at Yahoo!’s current lack of direction, the company has actually instrumental in creating Yahoo!’s current state. Microsoft got what it wanted in the search deal with Yahoo!. There are a number of good reasons why it wouldn’t look to acquire the rest of the Yahoo! business:
- An acquisition of Yahoo! would open Microsoft’s profitable server and tools business up to regulatory scrutiny and would probably get crucified under EU anti-trust law at the very least. The reason for this is the key role that Yahoo! has played and continues to play in the open source software community. Yahoo! is built on open source platforms and has contributed to the development of Debian distribution of Linux, Apache, PHP and Hadoop
- Microsoft has an online services business that has been spending 2USD for every 1USD that it earns. How can they be expected to turn their own and Yahoo!’s business around?
- Microsoft could buy a plethora of hot start-ups and still have change left over from the amount it would cost to buy Yahoo!
- If Microsoft managed to buy Yahoo!, they would be losing Yahoos hand over fist – cultural differences would have the employees running for the lifeboats women and children first be damned. Jerry Yang and David Filo would be probably amongst the first out the door, if it wasn’t of their volition Microsoft would probably help them out the door. There is too much bad blood there
Private equity
The model that someone like Silver Lake Partners or Blackstone Group LP would have to do would go something like this:
- Topple the board to make them more amenable to Alibaba and Yahoo! Japan at least buying themselves back or putting together a consortium to allow that to happen. In order to topple the board they would need the backing of major shareholders – these people would need to feel that they had a high chance of success and would be getting a premium on the share price. They would need to have a team that they could slot in place which would work: that’s why AOL was getting put in the mix because Tim Armstrong gives good copy as a CEO
- Sell or divest off other assets to interested media companies. This would probably be an extension of Bartz previous fire sale efforts. These would go at distressed prices as the media companies would realise that the private equity companies would be under time pressure. Parties who may be interested include the likes of News Corp. Someone like Naspers may be the ideal buyer for Yahoo!’s wholly owned Asian businesses in the likes of Malaysia, Hong Kong, India, Vietnam and Singapore
- The leftovers could then be bought by the private equity companies who would have to borrow a more reasonable amount of money and take it private. They would then have to work out where the fat was and make tough decisions like whether it was worthwhile shuttering Yahoo!’s German operations?
To get all that done would take a lot of faith from shareholders, otherwise the private equity companies would be struggling with financing. If the deal was financed out of China or the Middle East I think it would be likely blocked by US politicians – particularly when one thinks about the sensitivity of Google and China. Finally where is the value that the private equity companies could wring out of the business where successive CEOs have failed?
Conclusion
There isn’t an obvious immediate solution to Yahoo!’s dilemma. Much of the scuttlebutt is more like a shareholder fantasy rather than having any bearing on reality. Carol Bartz may come good on her promise to turn things around with time. If it carries on as it currently does things are likely to have to get a lot worse before an intervention from the board can occur, or they will have to wait 18 months for Carol Bartz’ contract to come up for renewal and Yahoo! can change captain and hopefully direction.