Reputational Value: The Questions Steve Jobs' Death Raises for Yahoo and Others

The dog that didnt bark was Sherlock Holmes's most famous clue. But the managers who didnt manage and the boards that didnt oversee them are the contemporary business equivalents.

Steve Jobs' untimely death raises a question for all companies, public and private, about the core meaning of value. That question has to do with the centrality to a business' worth of management, credibility, reputation, leadership and other intangibles.

Jobs demonstrated that management of disparate elements like design, communications, sales and financial performance were inextricably linked by leadership. His reputation eventually gave Apple and its products the benefit of the doubt from which it continues to benefit. It will be up to his successors to cement that legacy but he put the pieces in place.

The opposite appears to be true for companies like Yahoo and HP. They share similar roots in the Bay Area tech hothouse, but the legacy they have been bequeathed is a far sadder one. As the following story points out, yahoo has 686 million users, leading film and news media assets, but is mired in underperforming mediocrity. The common assumption is that the value of its parts is worth far more than the whole - because of the missing management and board governance that could have enhanced the company's reputation and boosted its market value as Jobs did for Apple. HP is also an example of how failed leadership at the senior management and board level have subtracted rather than added value.

While the world mourns Steve Jobs as an individual and a leader, it is worthwhile remembering how his creativity contributed to so many other aspects of value - and how the absence of leadership and vision like his can do the opposite. JL

Michael de la Merced and Evelyn Rusli report in the New York Times:

The chief executive of the Chinese Internet company Alibaba, Jack Ma, has breathed new life into the potential bidding for Yahoo, telling a Stanford University audience that he was “very interested” in the company. With Mr. Ma’s apparent entrance, an increasingly crowded field has lined up to weigh bids for Yahoo. The private equity firm Silver Lake Partners, Microsoft, the News Corporation and other investors and strategic buyers are among the potential bidders.

But the first question for any suitor of Yahoo is: What are you buying, exactly
While Yahoo is best known for its huge collection of Internet properties, most analysts and investors say the company’s most valuable assets lie in its 40 percent stake in Alibaba and its 35 percent stake in Yahoo’s Japan affiliate.

Yahoo is under some pressure to do a deal, after ousting Carol A. Bartz as chief executive last month without a successor — or a new direction — in place. While the company is in the process of hiring an executive search firm to find a permanent replacement for Ms. Bartz, according to a person close to the board, many analysts expect Yahoo to let its review of its business take precedence. And Yahoo’s value may take another hit when it reports it third-quarter results on Oct. 18.

Of the potential bidders for Yahoo, Mr. Ma has been the only one to speak openly about his interest. His comments, made late Friday, helped propel shares in Yahoo up 2.7 percent on Monday, to $13.53, amid a slump in the broader stock market. That gives the company a market value of nearly $17.1 billion.

Broken up, however, the pieces of Yahoo may be worth much more. Here’s a back-of-the-envelope valuation of Yahoo’s parts:

A tender offer for Alibaba shares led by the investment firms Silver Lake and DST Global valued the Chinese company at more than $32 billion, thus putting Yahoo’s stake at more than $13 billion. Assuming a normal corporate tax rate, the net proceeds from a sale of those shares could net Yahoo about $9 billion.

Meanwhile, Yahoo’s stake in its publicly traded Japanese affiliate was worth close to $6.5 billion as of Monday’s close. After taxes, a sale of those holdings could fetch roughly $4 billion.

Yahoo also had about $3 billion in cash and liquid investments as of the end of the second quarter.

The biggest trick is figuring out what the remaining piece, Yahoo’s core Internet business, is worth.

The average estimate of the company’s 2011 earnings before interest, depreciation and amortization is about $1.5 billion, according to the data provider Capital IQ. Given Yahoo’s difficulties, analysts have been loath to assign the company a particularly high earnings multiple, potentially pegging the core business at just $5 billion or so.

But Yahoo has also talked up some of its other assets, including more than 1,000 patents, including those for search and display advertising, that the company believes would fetch high prices.

So far, no front runner has emerged.

A number of private equity and strategic players are contacting Yahoo and holding meetings with other suitors to determine what groupings could make sense. Many are flocking to Mr. Ma, hoping to curry favor.

Under the terms of a 2005 agreement that Yahoo struck with Alibaba and Yahoo Japan’s majority shareholder, Softbank, the Internet company must give its two partners 15 days of exclusivity to buy out its stakes. After that, Yahoo can sell those holdings to any buyer of its choosing.

Several media or Internet companies, hoping to leverage Yahoo’s popular news sites, could be strategic partners, including Google, Facebook, Comcast and Microsoft, which made a failed bid for Yahoo in 2008.

The News Corporation, the former owner of the fallen social network MySpace, has recently emerged as one of the most proactive suitors. The media conglomerate has contacted Yahoo and several financial firms, including Silver Lake, according to three people with knowledge of the situation who requested anonymity because the talks were private.

Still, Alibaba, which has long been interested in clawing back its shares, could ultimately take the driver’s seat in a deal. It might buy back Yahoo’s stake in it and then slice up the rest of Yahoo and sell pieces to private equity and strategic buyers. To do so, it would need a consortium of deep pocketed investors, since any deal would require about $25 billion, or more, said Herman Leung, an analyst with the Susquehanna International Group.

With any deal, Yahoo’s board would probably prefer to sell the company in its entirety, instead of selling it off piecemeal, so as to minimize tax charges.

“There are probably at least 10 scenarios that could play out here,” said Mr. Leung, who says he believes a sale process could take six months or more.

But time is a concern.

“Yahoo’s biggest risk right now, is that the remaining value of the consolidated operations fades due to senior management attrition,” said Jordan Rohan, a Stifel Nicolaus analyst. “There’s an urgency at the board level to make something happen.”