3

First, some observations summarized here:

  • Verizon recently announced it'd be buying Yahoo's core business for about $4.83B in cash.
  • In addition, Yahoo holds stakes in Alibaba and Yahoo! Japan, currently worth about $41B.
  • In addition, the "Excalibur" patent portfolio not included in the Verizon acquisition is valued by PatentVue at $1B-$1.5B.

Those numbers sum to a bit over $47B. However, the current total value of Yahoo is just under $37B. Even if investors assigned zero value to the remaining patent portfolio and assumed the Verizon deal will fail completely and leave the core business valueless, that valuation is significantly less than the bundle of holdings. While the article frames this as an investment opportunity people seem to be missing, it seems unlikely that (a) a large number of sophisticated investors are just missing that math and (b) the article authors would prefer to just publish the information instead of trying to capture some value difference. This indicates there are really some significant negative factors included in the valuation. What are the big ones here?

  • 4
    What is the debt held by Yahoo? It could be that you add all the assets and subtract the debt, you get your $37B. Other than that - where are you pulling the "Alibab and Yahoo Japan stakes worth $41B" from? If that is coming directly off an exchange, there may be something else going on, but if it's from a publicized number inferred from a prior buyout, maybe that value has since changed? – Grade 'Eh' Bacon Aug 8 '16 at 15:33
  • @Grade'Eh'Bacon The valuation comes from the linked summary article, but checking the exchanges' share prices for those two held companies today it looks like the amount is probably a little higher. – WBT Aug 8 '16 at 15:38
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    Maybe the $16B of total liabilities according to the last 10Q is a contributor. – quid Aug 8 '16 at 18:13
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There are two very large negative factors that affect Yahoo's valuation.

The first is that their search business is in decline and continues to lose ground to Google and even Bing. There's no sign that they have any plan or product in the works to offset this decline, so there's tremendous uncertainty about the company's forward-looking revenues.

The second is that the company can't seem to decide what to do with its stake in Alibaba, clearly the company's most valuable asset. It they sell it, the question then becomes what they plan to do with the proceeds. Will they do share buybacks or offer a special dividend to reward investors? Will they use some or all of the money to make strategic acquisitions that are revenue-enhancing? Will they use it to develop new products/services?

Keep in mind one other thing here, too. There's a world of difference between what something is valued at and what someone's willing to actually pay for it. A patent portfolio is great and perhaps holds good value, assuming the buyer can find a way to monetize it. How exactly was the valuation of the patents arrived at, and are they worthwhile enough for someone to pay anywhere close to that valuation?

There's more to this than meets the eye by using a first-blush look at asset valuation, and that's where the professionals come in. My bet is that they have it right and there's something the rest of the market doesn't see or understand about it, hence questions like yours.

I hope this helps.

Good luck!

  • Thanks for your answer. Doesn't Verizon's acquisition announcement generally set a value for what the core business (search etc.) is worth (perhaps adjusted down a bit if investors think the acquisition might not happen)? That part of the valuation was based very directly on what someone is willing to pay for it. – WBT Aug 13 '16 at 20:25
  • Sometimes it might, but not always. Depending on how badly the acquiring company wants the target they're trying to buy, they may pay well above valuation to win. Look at some of Microsoft's acquisitions as proof of this, most notably Nokia. MSFT made some other acquisitions in which they had to take 80% writedowns afterward because the companies they bought had been paid for at ridiculous premiums. Sometimes companies will knowingly pay too much to get their foot in the door of a market they want to be in. This could be true of Verizon's purchase of Yahoo, but only time will tell. – Daniel Anderson Aug 13 '16 at 20:30
  • Perceptions of how much Yahoo might be worth to Verizon should be more likely to affect Verizon, now that the price for the acquisition has been set. Yahoo's shareholders now know how much they'll be (collectively) getting from the deal. – WBT Aug 13 '16 at 20:32
  • Excellent point, WBT, although I'd say the effect would be relatively minor since Verizon is strong financially, has good cash flow, and can absorb the debt pretty easily. Their purchase of Yahoo's core business is miniscule relative to what they paid to buy back the rest of Vodafone's stake in them for $130 billion. – Daniel Anderson Aug 13 '16 at 20:39

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