When Yahoo! (YHOO, Financial) announced in February that it is putting its core business for sale, the company’s stock traded at about $27 per share. Since then, its market price has rallied to trade at about $37 per share thereby representing a 37% increase in value.
The company has been the subject of several bids from suitors who want to acquire its struggling search business and accessories, and according to the latest reports current bids are below its expectations. In fact, some bidders are believed to be readying to submit half the expected amount.
While Yahoo! is widely recognized for its search engine Yahoo! Search, web portal and related services, including Yahoo! Mail, fantasy sports, advertising and video sharing, a majority of its current market valuation of about $34.5 billion originates from Yahoo! Japan and the company’s stake in Alibaba (BABA, Financial).
Why Yahoo! is for sale
Yahoo! is certainly one of the largest companies in terms of the Internet audience. The company receives more than 1 billion users monthly on its web platforms, but despite this number, it has failed to make them count in the form of conversion.
Specifically, Yahoo!’s mobile advertising campaigns have come up short of expectations by a wide margin, and this has resulted in its apparent struggle in keeping up with the rest of the likes of Alphabet’s Google (GOOG, Financial) and Facebook (FB, Financial), among others.
Yahoo! has continued to fall back. Over the last 10 years, there have been six different CEOs who have passed through its doors. Even under the leadership of Marissa Mayer, Yahoo! still remains an unsolved puzzle after almost four years.
When the company was founded, Internet ad business was small, and Yahoo! was popular. It looked like it could be a big player as the marketplace grew. But now, Google and Facebook have left Yahoo! behind, with their innovative algorithms that target ads to the most-interested eyeballs.
Yahoo! managed to beat Wall Street's expectations when it announced its financial results. However, no one cares much about those numbers. Rather, the once-mighty web portal-turned-media company is overshadowed by intrigue over its broader fate.
Who's looking to buy?
Yahoo!, as we have known it since 1995, may no longer exist in a few months. It will be bought and could be chopped up for parts or could be renamed.
With the ongoing news, Yahoo! might have to sell for less than expected. According to reports, Verizon Communication (VZ, Financial), which is now the front-runner in the bidding for the Internet company, is expected to submit a bid of around $2 billion to $3 billion for the company during the next auction round.
That figure represents a steep 50% cut from the previous estimates of Yahoo!'s value. Yahoo!’s initial estimates for its core business were in the region of $5 billion to $8 billion.
However, it could still be too early to name Verizon the outright front-runner in the bidding war. Recently, the founder of Quicken Loans Dan Gilbert joined the contest. According to sources, he has the backing of Warren Buffett (Trades, Portfolio), the chairman of Berkshire Hathaway (BRK.A, Financial).
Other companies that have shown interest in the struggling Yahoo! business include private equity firm TPG Capital as well as a combined bid from Vista Equity Partners, Bain Capital and former CEO of Yahoo! Ross Levinsohn.
Yahoo! will have little say in negotiating for a better deal, especially given the fact that the information about the current most likely bids is already public. In addition, the company has continued to report falling revenue in consecutive quarters as it tries to shift from its once lucrative web property business to one predicated on revenues from mobile devices.
Unfortunately, as the company’s desktop Ads revenue continued to plummet, Yahoo! has not been able to cover for the shortfall through its mobile ads.
Conclusion
In summary, Yahoo!’s potential sale has driven the company’s market value substantially. However, when you look at Yahoo!’s market value prior to the announcement that the company was going to offer up its core business for sale, the deals that are being floated in the media may yet be making a lot of sense.
According to this Investopedia article dated April 19, Yahoo’s stakes in Alibaba together with Yahoo! Japan were estimated to be valued at about $40 billion. So where does the $5 billion to $8 billion come from that Yahoo! is seeking for its core business? The company’s current market value stands at about $34 billion.
Any company that’s interested in buying Yahoo! will probably be looking at how it can use the business to augment its existing operations and how that will affect top line in a couple of years. That’s the only way buying Yahoo! would make sense.
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