Resumes Not the Only Problem With Yahoo
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s only been five months, but what an impact new CEO Scott Thompson has had on what was already a company striving to find its way. What's really unfortunate for Yahoo! (NASDAQ: YHOO) shareholders and potential investors is there were more than enough concerns before the recent PR problems surfaced. Though difficult to pin the slide in stock price and investor confidence on one thing - the failed sale several months ago of Yahoo's Asian assets was certainly a catalyst. Add to that the unceremonious departure of the former CEO and resignation of the Chairman, and bad press was the last thing the company needed.
As for the resume scandal we're all familiar with it by now – kind of tough to miss unfortunately. As big a problem as a Board not checking out the vitals of a potential CEO’s background is, this ordeal has only provided extra ammunition for disgruntled hedge fund investor Daniel Loeb. With a nearly 6% ownership stake in Yahoo, Dan’s got some clout - whether management likes it or not - and a history of not being shy using it.
Mr. Loeb’s fund – Third Point – has demanded the company hand over any and all documentation related to Thompson’s hiring, citing a Delaware law (where Yahoo is incorporated) stating shareholders can review such things if there’s just cause. He's since called for the removal of Mr. Thompson, and the naming of an interim CEO until a permanent replacement can be found.
Alibaba Group
Somewhat lost in the resume snafu are the recently circulated rumors Yahoo is once again discussing a sale of at least part of its 40% stake in Alibaba Group – as much as 25% according to some in the know – back to Alibaba. Investors will recall it wasn’t but a few months ago Yahoo was trying the same thing – along with other Asian assets like Yahoo Japan – to unlock shareholder value and focus on core business lines. There’s a difference this time though – a potentially huge difference.
First some quick background is in order – Yahoo is currently sitting at $18.5 billion in market cap. Depending on who you ask and what particular day you ask them – the company’s stake in Alibaba is valued anywhere from $13 billion up to as much as $17 billion.
This raises two critical points. Pessimists argue that shareholders are essentially investing in Alibaba and all things Eastern, not an ad revenue-generating, instant messaging internet firm with offices in Delaware. Now Alibaba Group has a huge share of the Chinese ecommerce and online auction market, but some may find it surprising the Alibaba investment makes up such a large portion of Yahoo's value.
The other crucial aspect is this – what was going to be a non-taxable sale of assets several months ago will now be “simplified.” Simple is usually good, right? Not this kind of simple unfortunatey. If these latest talks pan out Yahoo will owe U.S. taxes on the gains – and the good news is there are a lot of gains. There are accounting "techniques" to try and minimize the impact, but there's only so much number-crunching to be done. According to Loeb since the purchase of the Alibaba stake in ’05 it’s grown over 50% a year in value. But make no mistake, selling a portion of the Alibaba stake is exactly what Yahoo should do. The company is already sitting on over $2.2 billion in cash, so they're certainly not hurting in that respect. But this is really a matter of unlocking value, and no better way to do that than netting a couple billion to energize operations.
Competition
It’s not difficult to imagine the teams at Google (NASDAQ: GOOG), AOL (NYSE: AOL) and even News Corp (NASDAQ: NWS) sporting wry smiles about now - this isn't an industry that fosters camaraderie among the players. Rupert over at $47 billion News Corp is just glad someone's taken the spotlight of him - for a while at least.
For investors intrigued with the sector Google’s diversified streams of revenue and relative value compared to the industry remains the best alternative. AOL – though expensive by some measures – is expanding their offerings with the introduction of several new products and services. And for shareholders, strategically implemented, additional revenue opportunities are rarely bad things and bode well for AOL going forward. Of course News Corp has altogether too many headaches right now to consider except for the most contrary of contrarians.
There are two bets on Yahoo that make sense right now - one is wagering the company is able to follow through with the Asian asset sale to Alibaba Group. If that pans out shareholders will enjoy an immediate pop. The other bet is that Yahoo - at it's roots - remains, if not a leader certainly a major player, in the internet services/digital media sector. If so, a buy and mid to long-term hold strategy makes sense.
timbrugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Yahoo!. Motley Fool newsletter services recommend Google and 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. If you have questions about this post or the Fool’s blog network, click here for information.
