With Alibaba in talks with Temasek Holdings to buy back Yahoo’s (NASDAQ:YHOO) 40% stake in the company, [1] shareholders of the embattled internet giant could not be any happier. Yahoo is being squeezed on both ends by Google (NASDAQ:GOOG) in search advertising and Facebook in display advertising with its stock sliding by over 30% from Jan-Aug this year. [2] However, since the departure of Carol Bartz as CEO, speculation of Yahoo being broken up and sold off have provided some support for the stock.
See our full analysis for Yahoo’s stock here.
A Sale Seems the Best Option for Yahoo
Yahoo’s investors are exasperated by the company’s failure to adapt. Yahoo has fiddled long enough with changes to its leadership (See What Investors Want from Yahoo’s New CEO) as well as strategic partnerships such as the search alliance with Microsoft (NASDAQ:MSFT).
Unfortunately, most of these moves have gone awry, and the company’s user engagement has declined over time and taken advertisers with it. As a result, the view has crystallized that the best outcome for Yahoo shareholders would be a sale of the company in order to unlock the valuable Asian assets of Alibaba and Yahoo Japan while focusing on salvaging the remaining core online advertising business.
This has been the primary reason for the stock rallying in the past 2 weeks as many firms have expressed their interest in participating in a buyout of Yahoo. Several reports have valued the Alibaba stake valued at up to $13 billion, which would imply that Alibaba is almost 2/3′s of Yahoo’s current market capitalization.
We have a more conservative estimate of an implied $8.6 billion valuation for Alibaba, which admittedly could be conservative. If we look at Alibaba’s Hong Kong listing and implied market cap of over $40 billion, Yahoo’s 43% stake could be worth close to $15-20 billion. The question is who has this kind of cash to put into a major takeover? We believe figuring out how much to bid as well as who gets what in an asset sale is the primary reason a bid hasn’t been yet made.
Alibaba could be a good strategic fit for Yahoo given its knowledge of Yahoo and a desire to penetrate the U.S. market. With Yahoo’s stock already around 20% higher in October, we believe this support will continue as the likelihood of a tender offer increases.
We have a price estimate of $18 for Yahoo’s stock, which is about 12% above the current market price. You can drag the trend lines in the modifiable chart above to see the impact of these trends on Yahoo’s stock value.
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