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Lost in translation

10 August 2012 By Robert Cyran

This looks like a case of lost in translation for Yahoo. The internet group led by Marissa Mayer says it may use much of the bounty from selling its stake in Alibaba, the Chinese web conglomerate, for acquisitions, rather than returning it to shareholders in the form a special dividend or buyback. As crummy as that sounds, it is already baked into Yahoo’s value. Investors seem resigned to Mayer wasting a chunk of their cash.

Yahoo obviously did not hire Mayer to wind down the troubled company. The former Google hotshot is ambitious. And the $70 million pay package the company granted her must be predicated on bigger things than acting as a caretaker or liquidator. Yet investors seemed startled that Mayer now may hang on to the $4.2 billion or so Yahoo will reap after taxes from the sale of half of its stake in Alibaba. Yahoo’s shares fell almost 6 percent.

Turning around Yahoo by investing in search and mobile will be expensive, and will probably require multiple small acquisitions to land talented engineers. While investment may be the right course for turning around Yahoo, when a laggard goes shopping it’s risky. Desperate acquirers often overpay, and purchases turn to boondoggles. Just look at HP’s recent $8 billion writedown of goodwill from its $13 billion purchase of EDS in 2008.

Taking into account Mayer’s desire to go shopping, the question is how big a discount to place on the value of Yahoo’s cash. Its core business is worth about $6.6 billion, or four times 2013 estimated EBITDA, thinks Merrill Lynch. The company’s cash, stake in Yahoo Japan, and Alibaba group are worth about $16 billion after accounting for taxes and applying an illiquidity discount, according to the same analysis.

That would imply a value of $22.6 billion. Yet Yahoo’s market value is currently $18.5 billion. According to this math, the market is figuring the company will squander more than $4 billion of its cash. Given the multitude of ways the dysfunctional Yahoo has disappointed investors over the years, that may actually be a charitable assessment.


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