Financials Mergers & Acquisitions

Yahoo’s clouds linger as auction reaches final stages

Yahoo remains a very troubled company, and critics are (as usual, it seems) calling for CEO Marissa Mayer’s head. In the process of trying to sell itself, the company’s most recent Q2 figures have shown a $440m loss – and still no buyer.

Verizon seemed most likely to purchase the company, adding it to its recent $4.4bn acquisition of AOL, although AT&T’s name has also been linked to the company – as well as that of Warren Buffet. Financial analysts typically expect the core Yahoo assets to fetch $4-$5bn, but some outliers have said as much as $8bn.

But no buyer has emerged, leading to some apparent unease in the investor community. July 25 is the deadline for the final round of bids, with reports in the Wall Street Journal claiming that a first-round bid from Verizon stood at $3bn.

In addition, the press has picked up on a comment made by Mayer in the earnings presentation, which many feel hints at a deal with Apple – which currently uses Google as its default search engine.

The comment itself reads: “With Search making up more than half of our GAAP revenue, it remains an important area of our business. Today, our search business is built on strong partnerships with Microsoft, Google, Mozilla, Apple, and Oracle, among others.”

The deals with the other named businesses are well known, but as far as we know, Yahoo has no such dealings with Apple. The Cupertino neighbor wasn’t mentioned in the previous quarterly calls, and when asked why Apple was included this week, a Yahoo employee said that the pair had a long standing partnership with Apple as a search option for Safari.

Yahoo also has an Apple presence in its stocks and weather apps, providing the data for these apps in some markets, and there is a history of reports of Apple turning to Yahoo as a way to inextricate itself from Google – and Google pays Apple a sizeable amount to be the default search option in its browsers and iOS ($1bn in 2014). The Information reports that the deal with Google lapsed in 2015, but Apple notably hasn’t shifted the default option away from Google.

But while Apple deals remain speculative, and a buyer for Yahoo’s core assets has yet to be confirmed, the company still finds itself in hot water. While revenue climbed $60m to $1.3bn, with mobile revenue alone jumping from $252m to $378m, Yahoo’s share price has also slightly increased. This now values the company at around $35.8bn, although the vast majority of that figure is attributable to the 15% slice of Chinese monolith Alibaba that Yahoo owns.

Alibaba is now valued at some $207bn, meaning that the 15% stake alone is worth around $31bn (although that ‘value’ has shifted considerably due to the decline in the Chinese economy, and dragged Yahoo’s market cap with it), but Yahoo is in a difficult position due to business rules. Selling the shares would hit Yahoo with a huge (around $10bn) capital gains bill, if it took the route of spinning the shares off as a separate company.

Consequently, Yahoo is trying to spin off its ‘core’ assets instead, leaving the main Yahoo business with the Alibaba stake and a sizeable portion of Yahoo Japan (with Softbank holding the other large chunk of Yahoo Japan). Some Wall Street advocates believe that this shell company would be able to avoid the tax bill if it sold the shares directly to Alibaba, which would be a great benefit to the shell as it would otherwise bear the burden of that $10bn tax bill as an intrinsic part of its valuation.

Yahoo also announced the second write-down of Tumblr, following the Q1 February write-down of $230m with this quarter’s $482m. That’s a very bad return on the $1bn that Yahoo paid for the blogging site. Last quarter’s 15% reduction in Yahoo’s workforce might take a little longer than a quarter to have any positive impact on the financials.

The company’s revenue minus the commissions it paid for web traffic acquisition fell 19% in Q2, which is the sixth quarterly decline in the previous seven quarters. The main Yahoo website still draws 228.2m monthly users, with an average time spent per month at 12 hours, and while Tumblr and Flickr still perform well with their users, they don’t seem to do much good for Yahoo’s bottom line.

The Mavens division collectively generated $504m in quarterly revenue, but mobile was responsible for $378m of that total. Desktop revenue is some $875m.

“With the lowest cost structure and headcount in a decade, we continue to make solid progress against our 2016 plan,” said Mayer. “In addition to our efforts to improve the operating business, our board has made great progress on strategic alternatives. We are relentlessly focused on delivering shareholder value.”

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