The rest of the week is extremely crucial for Yahoo! Inc. YHOO investors.
After all, according to The Wall Street Journal, a series of board meetings will be held at Yahoo to discuss —
- whether to proceed with the spin-off of more than $30 billion in shares of Alibaba Holding Group Ltd BABA
- or sell its core business
- or both.
All the above will have a significant effect on investors as the mere report of the meetings sent shares up more than 6% in extended trading on Tuesday.
What Could the Decision be?
The report did not specify which business Yahoo intends to sell.
If, for instance, Yahoo were to sell Mavens and the search unit, the company would consist of only the Alibaba stake and Yahoo! Japan, i.e., its Asian assets.
If, on the other hand, it chooses to sell Mavens, all it would have is the ailing Internet search business. Even though it will be able to focus more on its search business, it would hardly be a sensible move given the stiff competition from the likes of Alphabet GOOGL and Microsoft MSFT.
In the third quarter, Search revenues (ex-TAC) were down 6% sequentially and 13.2% year over year. Key metrics were a huge disappointment, with paid clicks growing a mere 5% year over year, the lowest in the last four quarters. While the quarter is seasonally weak, it’s notable that for the first time in more than two years, Yahoo saw a decline (2%) in price per click. Management attributed this to Gemini-driven investments as well as Yahoo’s decision to forego some high-priced inventory that did not meet its quality standards.
However, if it does for some reason choose to sell the Maven unit, Alibaba could be a potential buyer. Why?
Because one cannot deny that Yahoo still commands one of the biggest Internet audiences globally, with more than 1 billion users. This would help Alibaba to move ahead in its strategy to penetrate into the media business in mainland China and beyond.
If it plans to sell the Search business, getting a buyer would be difficult, again considering the competition.
Now, coming to the Alibaba stake. Yahoo’s business is not really enticing and if it spins off the Alibaba stake, there will be nothing attractive about it. On the other hand, Yahoo shareholders may have to shell out around $9 billion in taxes if the IRS denies the tax-free status after the sale, which is expected to close in the current quarter.
What Should the Investors Do?
Most of the value of Yahoo’s $31 billion market capitalization comes from its Asian assets, Alibaba and Yahoo Japan.
Investors are valuing Yahoo’s core business at less than zero if the Asian assets were spun off tax-free. Any buyer would think twice considering the complications surrounding the Alibaba stake sale.
Yahoo could not get prior approval for its plan from the IRS, increasing the risk that the agency could later challenge the tax-free status of the spin-off.
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 this ailing Internet company. Since the Asian assets will fetch a good value, the uncertainty is related to what any 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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