A Blog by Jonathan Low


Apr 8, 2016

Yahoo Bidders Emerge: Verizon Definitely, Google Maybe. Time Inc. and Others Wavering. Microsoft Out: The Whys

For a business widely derided as useless and hopeless, Yahoo sure is attracting a lot of interest from primo bidders.

Which reminds us why the comments of activist investors criticizing the management of companies in which they have taken a stake is called 'talking their book.'

As the following article explains, investors are hoping to get some valuable assets on the cheap, including Yahoos customer data and its advertising technology. This will strengthen the offerings the bidders already have, and a lot less expensively than building the same capabilities from scratch. JL 

Alex Sherman and colleagues report in Bloomberg, Timothy Lee reports in Vox:

Verizon buying Yahoo looks like Verizon buying AOL. Both are internet brands whose best days are in the past. Yahoo makes money by creating content and selling ads against it. Verizon could use data gathered from its broadband and mobile networks to target ads effectively. Scale (is) important in the online advertising business. (They) prefer a few big deals rather than many small ones, so larger companies command premium prices. With Yahoo and AOL, Verizon would integrate ad sales teams and offer packages.
Bloomberg Verizon Communications Inc. plans to make a first-round bid for Yahoo Inc.’s Web business next week, and is willing to acquire the company’s Yahoo Japan Corp. stake to help sweeten the offer, according to people familiar with the matter.
Google, the main division of Alphabet Inc., is also considering bidding for Yahoo’s core business, a separate person said.
Potential suitors AT&T Inc. and Comcast have decided against bidding, some of the people said, asking not to be identified as the discussions aren’t public. Microsoft Corp., which failed with a hostile bid for Yahoo in 2008, won’t bid this time, another person said.
Time Inc. is still evaluating a bid, while private equity funds Bain and TPG -- among others -- are also planning to make a run at the business, either alone or by backing a strategic acquirer, the people said.
While the buyout firms haven’t yet paired themselves with a strategic buyer, they are open to the idea of doing so, the people said.
Yahoo has extended the deadline for first-round bids by a week, to April 18, according to a person with knowledge of the matter.
Shares of Yahoo Japan jumped 6.4 percent in Tokyo, the biggest gain in almost three months. Yahoo shares fell 1.3 percent to $36.17 in New York Thursday.

Three Banks

Verizon and its subsidiary AOL Inc. are working with at least three financial advisers on the Yahoo bid, said three of the people. Hiring so many banks is a sign that Verizon is serious about its takeover plans -- it has said since late last year that it was interested in buying some or all of Yahoo.
Verizon, which has a market value of about $213 billion, could give the Yahoo Japan stake to its shareholders or sell it, one of the people said.
Sunnyvale, California-based Yahoo would prefer to sell its 35.5 percent stake in Yahoo Japan, worth about $8.5 billion, along with the core business, Bloomberg reported last month. The valuation of the combined assets would make it more difficult for private equity firms to finance a bid for both parts.
Representatives for Yahoo, AT&T, Comcast, Time, TPG and Verizon declined to comment. Representatives for Bain and Google didn’t immediately respond to requests for comment.

Revenue Drop

Based on the financial information that it’s seen, Verizon values Yahoo’s core business at less than $8 billion, one of the people said. Verizon, as well as some private equity firms, met with Microsoft last month to talk about potential funding for a bid, people familiar with the matter said at the time.
Microsoft hasn’t committed any funding and is unlikely to provide anything more than a token investment to the winning bidder, one of the people said.
A spokesman for Microsoft declined to comment.
Yahoo’s projected revenue will drop almost 15 percent and earnings by more than 20 percent for 2016, according to a slide deck it released to potential bidders, Re/code reported Wednesday.
Verizon would replace Yahoo Chief Executive Officer Marissa Mayer with AOL CEO Tim Armstrong and Marni Walden, Verizon’s executive vice president, who would run a combined Yahoo and AOL, two of the people said.

Still on Deck

Japan’s SoftBank Group Corp. has always had tepid interest in buying Yahoo, two of the people said. So far, discussions have centered around Yahoo Japan, in which SoftBank is the majority shareholder, paying a reduced licensing fee to Yahoo.
The two sides are in active discussions to lower this fee, which stands at three percent of gross revenue, before any deal to sell Yahoo is announced. Yahoo Japan has argued the fee is too high because Yahoo hasn’t invested in technology the Asian company can use, causing the brand to suffer, one of the people said.
A representative of SoftBank declined to comment.

Yahoo’s Alternatives

Yahoo said it would explore strategic alternatives, including selling its main Internet operations, earlier this year after scrapping a long-time plan to spin off its valuable Asian assets. The company’s stock has declined about 20 percent in the past 12 months as turnaround efforts led by CEO Mayer stalled and sales have sagged, leaving the company vulnerable to activist investors.
Last month, CFO Ken Goldman said the board committee working on a possible sale of the core operations is “more active than anyone can possibly believe.”
Activist Starboard Value, a longtime Yahoo critic, said in March it was fed up with the Web portal’s leadership and called for the board to be completely replaced.
The activist fund, which recently increased its Yahoo holdings to 1.7 percent, said the board has failed to deliver results. The current board can’t be trusted to weigh the options that will best serve investors, and it’s important for the activist to be involved to ensure a “full and fair sale process,” according to a letter from Starboard CEO Jeffrey Smith. Smith has put his own name in as one of the hedge fund’s director nominees to the board.

VOX Yahoo's business has been doing so poorly that if you take the company's overall market value and subtract the value of stock Yahoo owns in two Asian internet companies — Alibaba and the independent company Yahoo Japan — you get a negative number.
In other words, Yahoo is less valuable than the sum of its parts. And for tax reasons, it doesn't make sense for Yahoo to sell off its Alibaba and Yahoo Japan shares. Instead, Wall Street has been pressuring Yahoo to sell the actual company — the business that operates the Yahoo website and services like Flickr and Tumblr, but not the shares — to a third party.
That plan looks like it's getting closer to fruition. Today, Bloomberg reported that telecommunications giant Verizon is planning to make a bid for Yahoo — in effect combining it with AOL, which Verizon purchased last year. Google is also weighing a bid, according to Bloomberg, while AT&T and Comcast have decided not to make an offer.

Verizon buying Yahoo would look a lot like Verizon buying AOL

AOL has a lot in common with Yahoo. Both companies are well-known internet brands whose best days are a decade or more in the past. Like AOL, Yahoo makes a lot of its money by creating internet content and selling ads against it.
When Verizon purchased AOL, it emphasized the company's portfolio of media brands, including TechCrunch and the Huffington Post. But as Matt Yglesias wrote for Vox last year, Verizon may have also been interested in AOL's ad technology business — and in particular how Verizon could use data gathered from its vast broadband and mobile networks to help AOL content companies target ads more effectively.

Either way, if Verizon was happy with its AOL acquisition, buying Yahoo, a company with a similar portfolio of technology, media, and advertising products, seems like a logical next step.
In recent years, scale has become increasingly important in the online advertising business. Advertisers prefer to make a few big ad deals rather than many small ones, so larger media companies are often able to command premium prices. With Yahoo and AOL under one roof, Verizon would be able to integrate their ad sales teams and offer advertisers packages that include media brands from both companies.

Yahoo would make Google stronger where it's already strong

The big downside to a Verizon acquisition is that Verizon is not known for nurturing software innovation. And while conventional media properties like Yahoo Sports, Yahoo News, and Yahoo Finance are important parts of Yahoo's portfolio, the company also has popular software products like Yahoo Mail, the Yahoo search engine, and Tumblr. These parts of Yahoo would be an awkward fit at Verizon, and they might have trouble recruiting and retaining the top-tier engineers they need to keep them on the cutting edge.
The other rumored bidder, Google, has essentially the opposite strengths and weaknesses. The tech behemoth knows all about managing software products and ad networks. Being acquired by Google would provide an immediate morale boost for Yahoo's technical talent, and might help Yahoo recruit and retain good programmers in the future.
That said, Yahoo's content business would be an awkward fit at Google, which prefers to act as a platform for other people's content rather than a creator of content in its own right.
Acquiring Yahoo would allow Google to bolster its position in markets — search, email, ad networks — where Google is already a leading player. Indeed, that might be a good reason for Google not to acquire Yahoo: Making its already dominant search and advertising divisions even more dominant might invite unwanted attention from antitrust regulators.
And with Yahoo's software products in an apparent death spiral, it may be only a matter of time before Google is able to attract many of Yahoo's users to Google's own platforms anyway.


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