Tuesday afternoon, Yahoo CEO Marissa Mayer announced that the company would spin off its 15% stake in Alibaba into a new public company.
The spinoff will happen this fall, after a lock-up period following Alibaba’s September 2014 IPO expires.
This spin-off is going to change everything for Mayer and Yahoo over the next couple years.
Here are some thoughts on what the new reality looks like.
- Yahoo is currently worth less than $US0. During a conference call to announce Yahoo’s fourth quarter 2014 financials, CFO Ken Goldman said that the 15% stake in Alibaba Yahoo plans to spin off is worth about $US40 billion. He also said that Yahoo’s stake in its joint venture with Softbank, Yahoo! Japan, is worth $US7 billion. Yahoo’s current market cap is $US45 billion. The market is valuing Yahoo’s core business at less than $US0 — even though it has $US11 billion in cash.
- In one way, this tiny valuation is great news for Mayer. If the market thinks Yahoo is worth $US0, even though it generated nearly a billion dollars in profit last year on $US4.4 billion in net revenues, that means the market has very, very low expectations for the future of Yahoo. All Mayer has to do to get the company’s valuation growing again is exceed these low expectations. She can do that merely by showing the company will continue to exist for the long term. (Put another way, Mayer has to get investors believing Yahoo has as much of a future as AOL, which is trading at 1.5X revenue multiple. If Yahoo had that kind of multiple, its valuation would be ~$US7 billion or more.) If Mayer manages to show that Yahoo will not only continue existing at its currently size, but can also grow revenues at an even modest pace, its multiple and market cap will quickly move higher.
- Mayer has some levers to pull to get growth growing. During the call yesterday, Mayer noted that Yahoo is halfway through its search deal with Microsoft, and that it is now able to renegotiate some of the terms. Such a renegotiation could be very fruitful, if only because Yahoo could threaten to eventually switch to Google. One source we spoke to said that if Mayer were to switch from Microsoft’s Bing to Google as its search and search ads partner, Yahoo’s annual revenues would grow $US1 billion in a snap.
- In another way, this tiny valuation is bad news for Mayer. Spinning off the Alibaba stake makes Yahoo a much smaller company. In many ways, that will make life harder for Mayer. It will be harder for Yahoo to use its stock for major acquisitions. It will make Yahoo vulnerable to takeover attempts from other companies and private equity firms eyeing its massive cash pile and steady profits. (PE firms Silverlake, The Chernin Group, and Bain Capital looked at Yahoo in 2011. Some Yahoo investors speculate Softbank will acquire Yahoo to reclaim the rest of Yahoo! Japan and replace Mayer with ex-Googler Nikesh Arora.) Finally, as a smaller company, Yahoo may face more pressure from investors. They may demand cost cuts, real estate sales, and perhaps even a merger with AOL.
- Mayer can finally start spending big money again. One consequence of putting the Alibaba stake in the rear mirror — and returning some $US50 billion of capital to shareholders — is that Mayer will now be able to spend some of Yahoo’s remaining $US11 billion in cash on acquisitions that can bolster its core business. On the call yesterday, Mayer said that Yahoo is particularly interested in buying companies that make apps that people use every day.
- Mayer has to start telling a story about Yahoo. For Mayer’s first two and a half years running Yahoo, the only thing shareholders cared about was Yahoo’s stake in Alibaba. From now on, Yahoo shareholders will closely scrutinize Mayer’s performance. To that end, she is going to have to come up with a story to tell them about her progress. She tried one out yesterday, talking about Yahoo’s “Mavens” business, a loose acronym for its mobile, video, native, and social advertising businesses. Mayer pointed out that Yahoo’s Maven’s business did not exist prior to her arrival in 2012, and that “if broken out on their own, they would be undoubtedly be one of the fastest growing startups in the world.” She said that the Mavens business made up for $US1.1 billion in Yahoo revenue last year, a 100% increase from the year prior. The key for Mayer at Yahoo will be for her to grow the Mavens business faster than Yahoo’s traditional advertising business shrinks. That is not something she was able to accomplish last year as, despite the Mavens growth, Yahoo’s overall revenues declined 1%.
Nicholas Carlson is the author of a new book called “Marissa Mayer and the Fight to Save Yahoo!“
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