Why Yahoo Could Be Worth More If It Split Up

Yahoo! Should Split Up, Says Alibaba's Jack MaAlibaba Group CEO Jack Ma (pictured) thinks Yahoo (YHOO) should be broken into pieces. "If running a big company isn't easy, divide it up into a few small companies," suggested the head of the large Chinese e-commerce company at the AllThingsD D9 conference. "They should be more open-minded about ways to solve their problems." What he doesn't say is why the breakup makes sense financially.

Yahoo owns 43% of Alibaba, which has been a sore point for Ma. Alibaba recently transferred ownership of its Alipay division to a separate company that Ma controls. The company said it made the move to comply with Chinese regulations. Yahoo! complains that the action has reduced Alibaba's value, and that it was not warned about the decision. The dispute between the two companies has been heated, and the conflict over the Alipay spin-off has not been resolved.

But could Ma be right about a Yahoo breakup? That depends to a large extent on what the three major assets of the company are worth. Those numbers have often been analyzed in the past, but perhaps incorrectly.

Critics of Yahoo look at its $22 billion market cap and say that the firm's large stakes in Alibaba and Yahoo Japan may be worth at least 75% of that. The Alibaba stake has been valued for as much as $11 billion and its share of Yahoo Japan at $6 billion. But there's a serious flaw in those valuations: There may be no buyer for the assets at those prices. Alibaba hasn't made an offer to buy out Yahoo -- at least, not in public. That's strange, since it has often said it wants Yahoo out. Likewise, its Yahoo! Japan partner, Softbank, has been reticent about offering to buy Yahoo!'s piece of the company. Assets without buyers don't really have a value at all -- except on paper. Yahoo! also has about $3 billion in cash on its balance sheet.

Still, if the theoretical figures for those Japanese and Chinese assets are right, the balance of Yahoo is being valued at $3 billion by the markets when its cash is factored out. Yahoo!'s annual revenue run rate as of last quarter was $5.6 billion. Its net income on the same basis is $1.2 billion. Based on those numbers, it's hard to imagine that Yahoo!'s core operations are worth just $3 billion. At six times net -- a conservative figure -- Yahoo!'s operating division is actually worth over $7 billion.

Microsoft (MSFT) made an offer to buy Yahoo for $45 billion in early 2008. The bid was high because for Microsoft, the deal was "strategic." Ownership of Yahoo would have pushed Microsoft's share of the U.S. search market as high as 25%. It would also have given Microsoft search a foothold in Japan. The combination of MSN and Yahoo portal business would have made the new property the largest online business in the U.S. based on audience. There are very few people who believed that Yahoo! was worth $45 billion to anyone other than Microsoft. Microsoft and Yahoo eventually did combine search operations. But the offer was an indication that Yahoo!'s market value is too low.

The point that most undermines Yahoo market valuation is that the company is barely growing -- but it's still very profitable. Taken solely as the sum of its parts, it may be worth nearly $30 billion: They make not like the source, but the Yahoo board may want to take Ma's advice.


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tarilop

Why Yahoo is Splitting while they make billions ?

If they are running a big company they should make branchs ( small assistants compay ).

If they are open minded about ways to solve their problems then they should make or get help by research centers.

" Microsoft and Yahoo eventually did combine search operations. But the offer was an indication that Yahoo!'s market value is too low. "

" ????? !'s market value is too low. " ! ! !


" value is based on search line and advertising line "

Thank you for reading Thank you again for this article

June 02 2011 at 2:53 PM Report abuse rate up rate down Reply
daviida

Given this person "MA" the time of day by quoting him is exactly why he thinks he can get away with just about anything including the latest developement with Yahoo There is no respect there or intrest in listening to what he has to say. Im sure he was very accomodating when looking for Yahoo's original interest and investment. Itis clear Carol Bartz is not up to the challenge but some one like Jack Welch would do fine even if only as consultant. Someone with a backgroung like Jack is cut of the cloth that could better deal with likes of MA.

June 02 2011 at 1:18 PM Report abuse rate up rate down Reply
supermat1

I'm sorry. I hate to be so shallow, but Ma is one wild looking dude. What is with the Chairman Mao jacket?
He looks a bit like an emaciated Bruce Lee fro Enter The Dragon.

June 02 2011 at 12:52 PM Report abuse rate up rate down Reply
FedUp2

It could also be true the the real value of Yahoo is zero, or less. If they have no control over asian assets like Ma demonstrated so clearly, those are worth nothing. If any of the rest of their value is based on search, they gave that away to MS, so there is nothing there anymore. They farm out their line advertising, which is based on the value of their content being generated. The bulk of that unoriginal content belongs to other people or worse, is inappropriate for monetization (porn and copyright violations) so that part of Yahoo is also worthless. They don't sell enough display ads to even cover their huge overhead, so actually, when you look at the big picture without the skew of VC BS pretend value attached, Yahoo in the red already. Hard to justify paying people millions of dollars to have them screw you out of your stock investments like that. Especially when they have the attention of a billion eyeballs, yet nothing to show for it all in the end. Given the number of times Yahoo had the world at their feet, but still managed to blow it, they are either cursed or just completely inept at business. They always buy high and sell low, after screwing up every overpriced start-up purchased they get. Yet, people still give them their money, based on total BS, paid advertisements from analysts, much like the bought off government regulators. When you are allowed to control your environment like that, you can get away with anything it seems.

June 02 2011 at 12:12 PM Report abuse rate up rate down Reply