Yahoo! Feels the Heat
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Is Nero reaching for a violin while his city goes up in flame? For the umpteenth time, Yahoo!'s (NASDAQ: YHOO) attempts to sell a pair of hugely valuable assets -- big stakes in hit Chinese online B2B marketplace Alibaba and YHOO's brother firm in the Land of the Rising Sun, Yahoo! Japan -- have hit a wall. Meanwhile, activist investor Daniel Loeb's Third Point hedge fund has started marshaling forces for a potential proxy fight for the company's board, nominating four big names as potential directors.
It's hard to put out a fire under such circumstances. Maybe, though, this new threat will be the catalyst for Yahoo! to finally, finally divest itself of its two big Asian properties. And quickly. Both are juicy investments, sure, but the company isn't (or shouldn't be) in the buy-and-hold-stocks business. Soon after being named CEO last month, Scott Thompson -- the fourth chief executive in as many years, by the way -- jumped into negotiations to sell the stakes. This was a good development, as it seemed he had heeded increasingly louder shareholder calls over the years for a sale.
But, as ever, those hopes seem to be fading away quickly. Despite the company's starting over with a new roster of board members following the departure (purge? jump-before-you-get-pushed exit?) of five boardies just after Thompson's appointment, the result of the sale effort was depressingly the same as ever. This was despite a sweet-sounding deal wherein Yahoo! would apparently avoid paying taxes while bringing in anywhere from $11 billion to $18 billion on the sale (this is a company, keep in mind, that has annual revenue of $6+ billion). It seems the deal fell apart when the parties involved couldn't settle on the final prices for the stakes. Really, though -- as many longtime YHOO shareholders would complain -- all this horse trading and haggling should have been settled years ago. At this point, most would be willing to live with a slightly lower take as long as the ever-dragging soap opera came to a definitive end. The company would finally be able to concentrate on what's supposed to be its core competency, offering web services. Or is that creating content? Or engaging in eCommerce? Thanks to distractions like the Asian assets, CEO churn, and a general lack of direction over the years, the company long ago lost its position as the search engine leader, ceding it without much of a fight to Google (NASDAQ: GOOG). Now GOOG is one of the masters of the tech universe while Yahoo! frets over the details of its deals and wonders which saturated business it should compete in next. This is a company that needs focus and goals, not a big share portfolio.
Yahoo! has a history of acting gun-shy in the face of huge deals. It's not only Alibaba and Yahoo! Japan. In 2008 it flatly refused an initial $44.6 billion buyout offer from Microsoft (NASDAQ: MSFT). That amount equated to $31 per share. As the stock currently trades at less than half that figure, to say that was an opportunity missed is a gross understatement.
Alibaba and Yahoo! Japan aside, YHOO could be the subject of a big, multi-billion-dollar deal -- but, again, from the other side, as the irrepressible Microsoft in addition to well-funded buyout operators like KKR (NYSE: KKR) and Blackstone Group (NYSE: BX) have been sniffing around of late. Both KKR and Blackstone are active dealmakers and veterans of many a large-scale buyout, and have combined forces in the past, for example as key players in the consortium that bought 88% of Danish telecom incumbent TDC in 2006.
They're interested because, despite its managerial turmoil and poor instinct for a good deal, Yahoo! still has plenty of inherent value. The company is soundly profitable, even if it hasn't been able to grow its top line, it still boasts one of the strongest and most recognizable brand names in the online space, has hundreds of millions of visitors to its sites, and is lightly indebted.
So hopefully Third Point will provide the shake-up Yahoo! needs, alone or perhaps with the help of another activist shareholder or several like financial gadfly David Einhorn, whose Greenlight Capital loaded up with 3 million shares of YHOO at the end of last year. The company needs to wake up and get some kind of deal done, either as a seller or the property being sold, or even both. Rome's burning; it's time to douse the fires and do something about the empire.
Motley Fool newsletter services recommend Google, Microsoft and Yahoo!. The Motley Fool owns shares of Google, Microsoft and Yahoo! Eric Volkman owns shares of Yahoo! Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.