Forget a Facebook IPO: Yahoo! Reverse Merger?

Yahoo! needs a bold move. Facebook needs – in the face of increasing pressure, at least from the world at large – to step into public capital markets. If they decide to work together, the result could be an interesting mix, to say the least.

This notion is raised in a Reuters blog post, and it’s an interesting one. The turmoil at Yahoo! is obvious, with CEO Carol Bartz out (in a blaze that falls short of glory) and more changes likely to come to the board of directors. The company needs to make some sort of change. Lately, the speculation has centered on the acquisition of embattled Aol, but Yahoo! has already put the word out that that isn’t going to happen.

So, what about Facebook?

The social networking leader is the constant subject of rumours, with an S-1 filing expected in the fourth quarter of this year and an IPO next year. By acquiring the already public Yahoo!, Facebook could avoid all the headache … and just ask Groupon CEO Andrew Mason how big a headache it can be.

Now, there are some reasons to avoid this route, the Reuters blog post notes. Facebook is growing rapidly. It’s on track to revenues of $3 bn this year, with a first-half performance of $1.6 bn top line and $500 mn bottom line. Also, odds are high that Facebook doesn’t have the $20 bn or so on hand it would need to take over Yahoo! and go public by reverse merger.

There are, however, ‘synergies’. Remember that word from a little over a decade ago? They are the opportunities that, theoretically, unlock potential … and with it a boatload of cash. For those of us with scars and memories from the dotcom boom, ‘synergies’ tend to be more potential than actual (now seems like a good time to mention Aol again).

The concept, as laid out by Reuters, is interesting. Yahoo! lacks a unifying factor for its disparate parts (Yahoo! Finance, Flickr and so on), and you could stick the biggest social network in the world right in the middle of that to solve the problem. If you could integrate the Yahoo! email platform with Facebook’s messaging, well, the sky’s the limit.

Now, think past the user: this is where the real value could be created. Facebook has a weak advertising platform. Sure, it accounts for 90 per cent of the company’s revenues, but it could generate a lot more if it were made friendlier to advertisers. Yahoo!, meanwhile, already has an enormous display advertising presence – and it hit $467 mn in what was a weak second quarter. If there is a good place to look for ‘synergies’, this is it.

Given that Facebook likely doesn’t have sufficient cash on hand, Reuters notes, a reverse merger would be hard to pull off, as it would have to be executed with Facebook stock. Facebook isn’t a veteran of big deals, and the implied valuation of $80 bn is a bit of a stretch. If you use the implied valuation from the recent IPG divestiture, $67 bn, as a yardstick, reality comes closer. But, it’s still a bit of a stretch to use that sort of stock, untested by capital markets, to buy out a public company.

Source: Reuters

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