Yahoo: Figuring Out Alibaba And Then Focusing On Original Content Creates Upside Cata
Yahoo needs to figure out what to do with its Alibaba holdings and divest them responsibly.
It needs to stop trying to play corporate VC with its deals with start-ups, and focus on its internal growth.
Yahoo should look to acquire AOL for cost-saving benefits, but also because of AOL's programmatic ads and its video ad technology.
Rolling out Tumblr as the next YouTube will require more investment from Yahoo.
Yahoo should look to acquire a small, but tremendously successful content creator.
With the Alibaba (NYSE:BABA) IPO behind it, Yahoo (NASDAQ:YHOO) is now left in a precarious situation as it attempts to implement a strategy that will make it grow at a faster-than-tepid rate than in previous years. For the 122 million shares Yahoo sold, it brought in $8.3 billion. It will have to pay the U.S. government 35% for this, but it still creates a windfall for the company.
However, the company is currently valued at significantly less than what it is holding. Between the Alibaba investment and its 35% stake in Yahoo Japan, the company is worth nearly $45 billion, not even taking its core business into consideration. Yahoo has a market cap of a little over $38 billion.
This shows that investors see no value in Yahoo's core business, which is problematic because the stock should continue to plummet as investors remove themselves from investing in Alibaba via proxy.
If Yahoo can get the Alibaba business behind it, it can double down on what I think is its best attempt at becoming a relevant, new world Internet business: original content.
Spinning Yahoo/Alibaba Off
For CEO Marissa Mayer to get anything done, she's going to need to first figure out what to do with the $8.3 billion (before taxes) that it received from the IPO. Further, the company needs to figure out what to do with the remaining 15% that it owns. There are three primary ways that Yahoo can do that.
The first is to simply sell Yahoo to Alibaba. That would end this entire game and give everyone a windfall. But for the sake of this analysis, and because I think Yahoo could be worth more than what Alibaba would pay, let's take that off the table.
The second way would be to form a new company called "Yahoo Hong Kong Proxy Incorporated" and throw the remaining 15% plus a piece of Yahoo into that company. It could then give that company to its shareholders. This would appease the shareholders, but it would leave the main company without any windfall to fund growth.
Or the company could do what's known in the tax business as a cash-rich split-off. In this example, company A puts cash and/or other assets plus some sort of a business into a subsidiary. It then trades that business to company B, which is holding A's stock. Here's an example:
Alibaba puts ~$25 billion plus a business - it needs to account for at least 30% of the value of the deal - into a subsidiary, which we will call AGA (Alibaba Give Away) Incorporated. Yahoo then gives Alibaba its shares of the business in exchange for AGA. Neither company will wind up paying a single dollar in taxes if this were to happen.