Four months ago, I said Yahoo! (Nasdaq: YHOO) was a buy below $17. The stock is since down 20%. But now underperforming CEO Carol Bartz is fired and the value of closely held Alibaba Group -- Yahoo!'s best asset -- is reportedly going up.
Combine those seeming improvements in the business with a falling stock, and this looks like a better buy than ever before. But is it? A few potential futures await Yahoo! shareholders, with some being better than others.
Possible future No. 1: The founder returns and soldiers on
Incredibly, Yahoo!'s board fired Bartz without any substantive succession plan in place and has yet to hire any counsel to aid in the search for a new chief executive officer. Meanwhile, CFO Tim Morse serves in interim purgatory. For a company already losing ground in U.S. search and online advertising, this is the worst possible scenario presuming the board intends for Yahoo! to remain an independent company.
Of course, it could be that the board does have a plan. Taking a page from Howard Schultz at Starbucks (Nasdaq: SBUX) or Michael Dell at Dell (Nasdaq: DELL), this could be the time for co-founder and former CEO Jerry Yang to return and restore the company to its former glory. Yahoo!, after all, has valuable assets, including $2.5 billion of net cash to play with and the world's No. 4 website by traffic.
While this has worked at Starbucks -- Schultz refocused the company and the stock has nearly doubled since his 2008 return -- it has not worked so well at Dell. The commoditization of PCs has forced Dell to try to adapt a business model that had already fallen behind competitors and the stock is down 40% since Dell's return. Which scenario does Yahoo! better resemble? Clearly, Dell's. Traffic to Yahoo.com, while still significant, is declining, and Yahoo! has lost the search market to Google (Nasdaq: GOOG) despite its best efforts.
Whether Yang returns to steer the ship or someone else is brought in to give it a go, this is the worst possible future for shareholders. It's more than likely that Yahoo! would destroy its balance sheet in an ill-fated attempt to compete with Silicon Valley's other tech titans, consuming its cash balance and then being forced to sell its investments in Asia.
Possible future No. 2: Divest and reinvent
With a couple flicks of the wrist, Yahoo! could find itself sitting on $17 billion of liquid net worth. That's thanks to more than $3 billion of cash and bonds, a near 35% stake in Yahoo! Japan (worth $4 billion after taxes), and a 42% stake in Alibaba Group. Yahoo!'s stake in the latter is worth some $10 billion after taxes if you believe reports that Alibaba was recently buying back shares at an implied $35 billion valuation.
That's a lot of dry powder a company like Yahoo! could use to go out and reinvent itself. For example, if Yahoo! wanted to become the king of U.S. Internet content, it, in addition to already bidding for Hulu, could go out and buy AOL (NYSE: AOL), Demand Media (NYSE: DMD), Bankrate (Nasdaq: RATE), TheStreet.com, XO Group, and Pandora Media and still have $10 billion left to spend on that balance sheet -- enough to buy LinkedIn.
Would that be an interesting collection of Web properties? Absolutely, and they would certainly reinvigorate top-line growth at Yahoo!. But would one want to be a shareholder? Probably not. Yahoo!'s problem has never been traffic, but rather figuring out ways to reliably grow that traffic organically and monetize it in a way that's less cyclical and competitive than advertising -- a problem all of these content sites are dealing with in one way or another as well. This is the type of plan that might sound good to investors, but ultimately not work out so well.
Possible future No. 3: The big buyout
Of course, Yahoo!'s board may not be incompetent for firing Bartz without a successor in mind, but rather prescient. After all, if they just want to sell the company, there's no use hiring someone just to pay him or her another multimillion-dollar golden parachute.
Although there are a number of rumored potential buyers, the one that's most intriguing to me is Alibaba Group itself. That's because Alibaba CEO Jack Ma is one of the few people who could rest assured that he would reap full value by buying Yahoo!'s stake in Alibaba Group. And since he wouldn't need to apply a liquidity discount or a China discount to buying Yahoo!'s stake, the Yahoo! stake to him alone is worth almost $15 billion -- maybe more, since doing so would erase the risk of being beholden to a petulant outside shareholder that does not share his vision for the business. A $20-per-share bid would imply a $25 billion valuation. If that were to come to pass, Yahoo! shareholders (from current prices) would walk away happy and Ma would only need to find $10 billion worth of value ($8 billion which is sitting in cash and investments) to make this deal more than worth his while.
Would Google or Microsoft or AOL or private equity pay $2 billion to $3 billion for Yahoo!'s Internet business? That's a no-brainer -- and everybody wins (except the naive Yahoo! shareholders who were hoping to hold Alibaba forever as it became a massive e-commerce company in China).
The global view
Jack Ma should buy Yahoo!. He can make a satisfying offer to Yahoo! shareholders and solve his biggest corporate problem while turning a tidy profit. His bid would also likely be supported by the powers that be in China as an announcement that China's high-tech industry in ready to rival that of America's, meaning that he might benefit from very reasonable bank financing.
Will he do it? I have a feeling we'll find out sooner rather than later.
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