Wall Street is clamoring for Yahoo to sell its core business, following Wednesday’s letter by activist shareholder Starboard — but the appetite for a deal becomes more complicated once the list of potential buyers is drawn up.
It’s all speculation at this point, as Yahoo hasn’t publicly put itself up for sale, but the differing opinions by analysts show how turning around, or selling, a once-dominant internet business is a challenging endeavour.
While many analysts and industry insiders believe that selling Yahoo in one piece is better than breaking it up, such a deal will limit the pool of buyers.
“We think that it’s inevitable at this point that you’re going to have significant change — probably the sale of the core,” SunTrust’s managing director Robert Peck told Business Insider. “Most likely the whole core [will be sold] because it’s too hard to split out the various verticals.”
Pressure is increasing on Yahoo, as its business remains stuck in a rut and its stock languishes 40% below its 52-week high. On Wednesday, Business Insider reported that the company was preparing to lay off 10% or more of its workforce as early as this month.
Big media companies
Peck listed the big media and communications companies, like Verizon, AT&T, and Comcast, as the most likely buyers of Yahoo. They’re the most logical acquirers who could immediately take advantage of Yahoo’s advertising technology, mobile reach, and still massive user base, he said.
Yahoo’s core business, which includes its online content and advertising segments, could fetch a price tag of $6 billion to $8 billion, according to Peck’s estimation. He said there’s a chance that private equity funds could buy at a lower price, too. But in any case, a core sell off would most likely bring a change in Yahoo’s management, including current CEO Marissa Mayer, he said.
The WSJ recently reported that Verizon would “likely explore a purchase” of Yahoo, citing anonymous sources, while its CEO Lowell McAdam said at Business Insider’s IGNITION conference last month that he’d consider a Yahoo acquisition “like anything in the digital media area at this point, because it’s so hot.”
Yahoo said in December that it was exploring a plan to spin off its core business into a separate publicly traded company. Yahoo’s chairman stressed at the time that the company was not putting itself up for sale, though he acknowledged that Yahoo would have to entertain any offers it received.
Pivotal Research’s senior analyst Brian Wieser has a different view. Although he seems to agree the big media companies are the obvious candidates, there’s a good chance that non-obvious companies that own huge data assets could emerge as buyers, too.
“Anyone who thinks they have got huge data assets that could be monetized for digital advertising could theoretically have a strategic interest in Yahoo,” Wieser told us.
He cited Alliance Data Systems’ $2.3 billion acquisition of digital marketing company Conservant as an example of a company with large amounts of data using M&A to add an advertising salesforce and publisher relationships. Even Verizon’s recent $4.4 billion acquisition of internet company AOL was rooted in Verizon’s need to monetise its huge customer data, he said.
Yahoo still has hundreds of millions of users and a strong existing advertising network, which makes it an appealing target for large companies, he said. But Wieser only pegged a $2 billion valuation on Yahoo’s core business, because it’s been in decline for years and it’s in a space that’s already owned by two massive players, Google and Facebook.
“All digital advertising’s growth can be accounted for basically by Google and Facebook,” he added. “What Yahoo used to do uniquely well is no longer unique.”
The crown jewels
A potential sale of Yahoo’s core business is a complex issue that will take a long time to reach a conclusion, Needham & Co. analyst Laura Martin said.
“Everybody’s smart here, but there isn’t a clear path to maximizing value, and nobody agrees on the path,” she said. “It’s just a big, complicated mess.”
Martin agreed that Verizon would be the most logical buyer. But she stressed that a sale of Yahoo would only make sense if someone acquired the whole entity, rather than selling off the company’s smaller “crown jewel” assets separately. They won’t command the same type of multiple Yahoo is seeking, which is in the ballpark of 6 to 8 times its $800 million EBIDTA.
“They won’t be able to get as much money by adding up all the crown jewels,” she said.
But the bigger problem is the fact that Yahoo still seems to be lost with its future direction, while everyone has different thoughts on how they could turn it around. And it doesn’t look like one move could solve all the complex issues.
“Turning around internet companies is proving to be really, really hard,” Martin said. “It’s an open question whether these internet companies can be turned around once they start falling from sort of their grace.”