Yahoo! Inc. YHOO has discarded its plan to spin-off its $32 billion stake in Chinese e-Commerce giant, Alibaba BABA, according to a CNBC report. This comes amid investors’ concern about a potentially enormous tax bill.
Yesterday, following the news, Yahoo shares went up more than 2% in after-hours trading in New York.
What Next?
Yahoo shareholders are cheering a possible sale of its business, and ongoing board meetings have sent the shares up after a long weak spell.
However, the board has an extremely difficult decision to make because it has to sell a core business that isn’t growing and which Yahoo investors aren’t willing to pay anything to hold. It is an open secret that Yahoo trades on the value of its Asian assets despite the huge user base that trails only Alphabet’s GOOGL Google and Facebook Inc. in size.
The traditional search and display businesses are dwindling. So the only part that looks a little promising is the Mavens unit and the only hope of making a sale is pursuing unknown outsiders that it will continue to grow.
Potential Buyers
If it decides to sell the core business, the only parties likely to be interested are Japan’s Softbank, Alibaba, or maybe a Chinese Internet company that could buy some parts given the country’s focus on building an indigenous technology sector. However, Alibaba will most likely be interested in buying back its own shares to boost earnings per share. And that doesn’t help Yahoo investors in any way.
Google won’t be able to buy for competitive reasons and Microsoft is unlikely to be interested given its solid strategy regarding Bing and the fact that is has been doing away with its own advertising business. Nevertheless, Yahoo’s technology and user base could be attractive to telecom players like AT&T or Verizon Communications Inc. VZ.
At the UBS Global Media and Communications Conference, Fran Shammo, Chief Financial Officer of Verizon, hinted that the company may consider acquiring Yahoo, if the deal promises adequate value for shareholders.
Naturally, the possibility of a takeover by the U.S. telecom behemoth is still at a nascent stage. However, if the deal materializes, we believe Verizon will significantly benefit from it.
The core businesses of Yahoo perfectly complement Verizon’s focus areas. If the deal takes place, Yahoo’s online ad technology and popular content, apart from the vast user base will be combined with AOL Inc.’s (Verizon bought AOL in Jun 2015) targeted ad technology and consumer data platform. It will be integrated into Verizon’s massive subscriber base and Internet-based mobile video offering to provide a powerful data-driven targeted mobile ad platform.
What Should Investors Do?
If Yahoo does manage to find a buyer for part or all of its business, this would be an opportunity to finally cash out of the ailing Internet company. Since the Asian assets will fetch a good value, the uncertainty is related to what a buyer would be willing to pay for a core business that the market has bailed out on.
We would advise investors to hold on to this Zacks Rank #3 (Hold) stock for now. However, as Mark Tinker, head of Framlington Equities Asia at AXA Investment Managers, puts it, “investors should view Yahoo stock as a restructuring proposition, not a growth one.”
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