In all the buzz and banter about the fate of beleaguered Yahoo (YHOO), the key question dominating all the speculation about a possible takover of the Internet pioneer is whether Microsoft (MSFT) is in or out of the picture.
But definitely, don�t count out Microsoft. You can bet that Microsoft will surely be in the picture, in some important way � if not completely in it as a sole bidder for Yahoo. On Oct. 23, 2011, I wrote in this space that either Microsoft or Alibaba Group Holding, a Chinese major Internet company, will end up winning Yahoo. Today that proposition is still a valid one, although most Wall Street analysts now believe Microsoft won�t go hog and try to take all of Yahoo in the way it tried to do in 2008, when it offered to buy it at $33 a share.
But many cooks have since come up to stir the pot, which has made the situation more complicated than it should be. On Nov. 30, a Bloomberg story speculated that Silver Lakes Partners and a group of investors have offered to buy some 10% to 15% of Yahoo at $16.50 a share. Another is Thomas H. Lee Partners, which is reported to be interested in buying the U.S. operations of Yahoo. And other interested parties want to link up instead with Yahoo�s partners in Asia, where Yahoo�s assets, specifically a 43% stake in China�s Alibaba and 35% in Yahoo Japan, are estimated by Evercore Partners to be worth a combined $14 billion, or $11 a share.
But lest investors get bewildered and confused by all the speculation and conjectures, there is but one thing to focus on: Yahoo shares are undervalued by most metrics that analysts use, closing today (Dec. 1, 2011) at $15.72 a share, down from its 52-week high of $18.84.
Forget all the wranglings about what Yahoo will opt for, or what its many suitors want to do or pay for its combined or partial assets. The thing to keep in mind is, Yahoo, in spite of management bunglings and ineptitude, including Yahoo co-founder Jerry Yang�s mindless rejection of Microsoft�s offer when he was in charge, is one of the most attractive Internet plays these days.
One analyst who thinks so is Standard & Poor�s Scott Kessler, who rates Yahoo a �strong buy� with a 12-month price target of $20 a share. He believes there is, indeed, significant interest in some parts, or all of the company. �We not only see considerable value in Yahoo�s major investments in Asia-based businesses, but note stabilization in the display business, benefits from the Microsoft (ad-search) deal, and potential associated with properietary content/video,� says Kessler.
Ken Sena, analyst at Evercore Partners, says his estimates show that Yahoo can achieve a mid-$20s price, based on his valuation of Yahoo�s rich assets in Asia. Sena, who rates Yahoo as �overweight,� says the risk-reward ratio remains attractive despite the fact that a high level of deal expectation is already in the stock.
Even so, he believes that even without a takeover, Yahoo is still worth at least $18 a share based on its core assets and operations. But its value could climb to the mid-$20s if it did a �cash-rich split-off of its Asian assets,� assuming that 100% of the cash proceeds from the split are devoted to buying back shares, says Sena.
The idea of splitting off Yahoo�s Asian assets is gaining adherents on Wall Street. �We continue to believe that a cash-rich split off of the Asian assets is the solution to unlock shareholder value,� says Jordan Rohamn, analyst at investment firm Stifel Nicolaus, who rates the stock a buy with a price target of $18 based on a sum-of-the-parts valuation.
Alibaba�s CEO Jack Ma has indicated publicly that he has arranged the required financing to buy back Yahoo�s Asian assets � up to $20 billion. Alternatively, Jack Ma and his partners may just decide to consider a bid for all of Yahoo if they can�t buy the Yahoo�s Asian assets, says Rohan.
He notes that Yahoo is one of the most globally recognized names on the Web, and a leading Internet-based media company. So it makes great sense for Alibaba or Microsoft to seriously ponder the idea of grabbing Yahoo, while the opportunity of grabbing is good.
Ken suggests that instead of management�s proposed �leveraged recapitalization,� Yahoo should do a cash-rich split-off for Yahoo�s Asian assets, assuming no takeover deals place soon.
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