Yahoo! Turns East

The latest batch of media articles suggesting that Microsoft (Nasdaq: MSFT  ) is underbidding for Yahoo! (Nasdaq: YHOO  ) argues that Microsoft isn't accounting for the nearly $12 a share packed into Yahoo!'s asset base with cash and foreign securities.

This morning's Wall Street Journal broke down the value of the company's overseas stakes and balance-sheet greenery.

Stake

Market Value

Value per Share

Yahoo! Japan

34%

$8.9 billion

$6.35

Alibaba Group Holding

40%

$5.3 billion

$3.78

Gmarket (NASDAQ:GMKT)

10%

$0.1 billion

$0.08

Cash and equivalents

 

$2.4 billion

$1.68

Total

 

$16.7 billion

$11.89

Sources: Citigroup Global Markets; WSJ Market Data Group.

I don't buy it. It's not as if these are hidden assets here. Yahoo! has spent the past few quarterly conference calls pointing out the value of its Asian investments. The cash on the balance sheet is always there. This isn't a masquerade party.

In fact, the reason why Yahoo! has been trading at a higher earnings multiple than the faster-growing Google (Nasdaq: GOOG  ) over the past couple of years is because the world knows all about the company's portfolio.

Is anyone naive enough to believe that Microsoft would offer nearly $45 billion for Yahoo! if it had sold off its investments? Let's see. Yahoo! EBITDA clocked in just shy of $1.4 billion last year, or $1.9 billion if you generously eradicate the waste of stock-based compensation for an underperformer like Yahoo!. Microsoft would be nuts to pay 23 to 32 times trailing EBITDA for a company that is losing market share to Google with each passing quarter.

Yahoo! also can't just sell off its Asian investments without bearing the brunt of significant tax liabilities. Yahoo! paid just $1 billion for its initial 40% stake in Alibaba. Don't expect the tax man to look the other way on what would amount to a $4 billion taxable gain. That's assuming that Yahoo! would even find a buyer without moving the market lower.

The tax-friendly solution would be to spin off those investments to its investors, but all that would do is eliminate the mattress that has kept Yahoo! shares from sinking even deeper based on its own disappointing fundamentals.

Either way, if you somehow justify writing off the $16.7 billion value in its entirety from Microsoft's original $44.5 billion offer, you still find Microsoft willing to pay 20 times the company's 2007 EBITDA (including tax-based compensation).

Yahoo! Take the deal. The Asian escape route isn't as easy as it seems.

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