The Skinny on Yahoo

WSJ Article Discusses Acquisition of Yahoo. According to a Wall Street Journal article published on Wednesday, “AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo”. The article cited Silver Lake Partners and Blackstone Group as firms with interest in taking Yahoo private. Additionally, the article discusses a couple of scenarios, including: 1) Yahoo’s Alibaba stake would be sold back to Alibaba and some of Yahoo’s other assets would be sold off as well; 2) AOL combines operations with Yahoo in a reverse merger after Yahoo disposes of its Alibaba stake. According to the article, discussions are preliminary and Yahoo has not been approached.

Our Thoughts on Potential Acquisition. As we recently indicated in our Yahoo Asia Assets discussion, we believed Yahoo at per share was essentially receiving no value for its core business. At yesterday’s closing price of .25, Yahoo is trading at 2.3x 2011E EV/EBITDA, which assumes 1) Yahoo’s core business estimated EBITDA of .8B in 2011 2) current cash of .73/share and 3) total investments of .50/share which assumes a 30% discount on Yahoo’s Asia assets (Yahoo Japan,, Alibaba Group). We believe positives from a potential acquisition are: 1) provides a near-term catalyst for Yahoo shares – the biggest issue most hear from investors is that while shares are inexpensive, Yahoo lacks a near-term potential catalyst 2) a merger of AOL-Yahoo would provide clear revenue and operating synergies on both display and search. We view negatives from a potential deal are: 1) a near-term deal may not give Yahoo credit for improved bottom line performance which we expect to occur in 2012 (i.e. full benefit of MSFT search merger) 2) by selling its Alibaba stake, we believe Yahoo would be selling its most valuable long-term asset, especially Taobao which many believe could be worth B today.

What Could Yahoo be Valued at in an Acquisition. Clearly, there are a number of scenarios that could impact Yahoo’s acquisition value including tax implications for its Asian assets. We note that our current price target of assumes a 6x EBITDA multiple on Yahoo’s core business, .50 in investments (after 30% discount), and .73 in net cash. We believe that at a minimum, Yahoo shareholders’ would require an 8-10x EBITDA multiple on its core business which would value Yahoo shares at -25 (still well below MSFT takeover offer of ).


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