Yahoo! (Nasdaq: YHOO) may opt for a go-private transaction as the pressure mounts on the company's board after three of its top executives stepped down on the same day, an analyst at Jefferies & Co. said in a note.
On Thursday, Yahoo! confirmed the departure of Hilary Schneider (executive vice president of the Americas), David Ko (senior vice president of U.S. Audiences, Mobile and Local) and Jimmy Pitaro (vice president of Media).
"The departure of Schneider, Ko and Pitaro could not have come at a worse time for Yahoo!, with the company in the midst of transitioning its paid search to Microsoft's (Nasdaq: MSFT) Bing, while entering its most important quarter of the year. We see three options ahead, including a go-private transaction," said Youssef Squali, an analyst at Jefferies.
The analyst said these departures raise questions about the troops' commitments to CEO Carol Bartz's vision for the turnaround. To be fair though, Carol Bartz was able to get at least 2 top hires, Tim Morse, CFO and Blake Irving, Chief Products Officer.Squali said any execution stumble would weaken Yahoo!'s position in display and benefit competitors like Google (Nasdaq: GOOG) and AOL. As the pressure mounts on the board, the analyst sees three options emerging for the company: persevere in the fight, sell assets return money to shareholders, and go private.
The analyst said the most likely path CEO Bartz will want to follow is to quickly hire a new head of sales (may be COO/president material), re-energize the troops and rekindle growth. This would take several quarters before it bears fruit, as the new hire assembles his/her team and formulates a game plan.
The analyst said such a length of time could prove too long given investors' growing impatient with management and the board. Under this scenario, the stock is likely to languish.
While management has repeatedly refuted any plans to sell the Asian assets, it may have to look harder to find a way to do so. Roughly 60 percent of the company's capitalization is locked up in its Asian assets, and until management shows a willingness to part with at least some of it, it will only get minimal credit, Jefferies said.
The analyst said the management may also have to explore ways to separate its search and display businesses as they may be more attractive to buyers separately than together.
"Our SOP analysis suggests that Yahoo! is perhaps more valuable to a financial buyer able to unlock the value of the assets in a private setting. Going private would allow management to make the choices necessary for a turnaround without the scrutiny of public markets. We estimate Yahoo!'s value under this scenario at $20 to $23 per share, in line with the 10 to 12 times of EBITDA paid for INET and RATE, two smaller players in the content space," said Squali.
The analyst said core buy thesis remains valid, given expected improvements in Display in 2011, margin expansion potential and valuation. For third quarter, the analyst's channel checks suggest an inline quarter. While search is still relatively weak, display remains healthy with good traction in Retail, Travel, Telecom and Finance, key segments for the company.
The brokerage maintained its "buy" rating on shares of Yahoo! with a price target of $21. The brokerage also maintained its 2010 EPS estimate of $0.70 on revenue of $4.664 billion and its 2011 estimate of $0.80 on revenue of $4.833 billion.
Yahoo! shares closed Thursday down 1.19 percent at $14.17 on the Nasdaq.
International Business Times, The Global Business News Leader
