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The forks keep clanging the Champagne glasses, louder and louder.
Unfortunately for all of the buzz that's been building over the past few days, while a marriage between the two dot-com laggards makes sense on paper, it's going to be hard to pull off the deal in reality.
The Wall Street Journal spells out the scenario this morning, where private equity firms team up with AOL to buy the larger Yahoo!. This sets the stage for Tim Armstrong -- AOL CEO and former Google (Nasdaq: GOOG ) executive -- to run the combined company.
The news has been enough to send Yahoo! shares speculatively higher this morning, but check your enthusiasm at the door, folks. There are several hurdles along the way. Let me go over the doozies.
1. Cheap is relative
At today's prices, Yahoo!'s most valuable assets aren't homegrown. It is the meandering dot-com's stakes in Yahoo! Japan and China's Alibaba that have kept the shares in the double-digits.
ThinkEquity analyst Aaron Kessler recently concluded that liquidating the positions would result in roughly $9.50 a share in proceeds after taxes.
Yahoo! also had $3.8 billion in cash and marketable securities at the end of June -- or about $2.70 a share. Let's go ahead and round this all down to $12 a share.
The unlocked value in Yahoo!'s overseas investments and balance sheets is going to be a natural attraction to key-waving firms. Private equity can cash out of its Asian investments (and China, for one, really wants its Alibaba baby back), and a buyout at $16 would really mean a net price of just $4 a share.
Well, we know what buyout buzz does to a stock. If private equity firms have to pay $20 instead of $16 -- even if it's just a few bucks -- it means that the firms would be paying twice as much for Yahoo! after unloading the $12 per share dowry.
If Yahoo! demands a $32 exit price -- or twice what it's worth today -- it would mean that the real cost would be five times greater (or $20 versus $4). In other words, this plan begins to fall apart quickly if Yahoo! shareholders expect a sizable buyout premium.
2. Yahoo! won't kowtow quietly
In a CNBC interview earlier this year, CEO Carol Bartz claims that she would have accepted Microsoft's (Nasdaq: MSFT ) 2008 buyout offer in the low to mid $30s. Given the "sum of its parts" argument I voiced earlier, no one is going to pay that much for the purple bleeders.
There is potential at Yahoo!. The portal continues to draw a ton of traffic, even if it's a monetizing challenge. However, there is going to be a big gap between what private-equity firms are willing to pay and what Yahoo! will accept.
Buying Yahoo! won't come cheap, especially if the game plan is to have the CEO of the much smaller AOL call the shots. Shareholders may not like it, but forcing Yahoo! to have its pride publicly gutted in playing second fiddle to AOL is going to have to come at a steep price.
It's not likely to happen.
3. There is another way out
Yahoo! has resisted Alibaba's advances to buy its 40% stake in the company behind China's leading B2B and consumer-facing marketplaces. However, if Yahoo! has to explain why it's not going to punch out at $18 or $20 in a hostile privatization coup, it may be forced to sell its Asian investments and pay out a chunky one-time dividend. A naked Yahoo! would be an eye-opener, but it would be beating the firms to the punch.
Thankfully, there's another option. That $3.8 billion in the bank can go a long way in a shopping spree.
It can't afford Facebook. Twitter would be another high-traffic, crummy-monetization situation.
- The Knot (Nasdaq: KNOT ) is being served up as buyout bait by at least one major analyst. Traffic growth is suppressed, but the monetization potential is enormous.
- IAC (Nasdaq: IACI ) may be willing to give up Ask.com. It would be one way to widen the gap between Yahoo! and AOL.
- MercadoLibre (Nasdaq: MELI ) would give Yahoo! a huge presence in Latin America and help establish an e-commerce marketplace presence that Yahoo! sorely lacks.
If Yahoo! wants to turn off potential buyers, fattening itself up with acquisitions is an easy path -- as long as it's buying companies that make sense.
Sorry, AOL. Better luck next time, private equity.
Do you think Yahoo! will be bought out? Share your thoughts in the comment box below.