The Alibaba IPO dominoes are falling — and Yahoo and AOL may be next in line.
A week after Yahoo YHOO +3.7% shares plummeted when the company’s stake in China’s ecommerce powerhouse didn’t pan out as high as some expected, the web portal is back up on Friday after activist investor Starboard Value urged Yahoo CEO Marissa Mayer and the board to talk with rival and oft-cited potential merger partner AOL AOL +2.72%.
Starboard “believes a combination between Yahoo’s Core Search and Display Businesses and AOL Could Result in up to $1 Billion of Synergies While Also Potentially Facilitating the Realization of Value from Yahoo’s Non-Core Equity Stakes.” Here are the four opportunities Starboard wants Mayer to pursue:
1. Unlocking the substantial value from Yahoo’s non-core minority equity stakes in Alibaba Group Holding Limited (“Alibaba”) and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner;
2. Realizing substantial cost efficiencies by reducing expenses throughout the Company, specifically with a goal of reducing losses in the Display business by between $250 and $500 million;
3. Halting Yahoo’s aggressive acquisition strategy which has resulted in $1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased; and
4. Exploring a strategic combination with AOL, Inc. – a company we know well – which could improve Yahoo’s competitive position, deliver cost synergies of up to $1 billion, and potentially facilitate the realization of value from Yahoo’s non-core equity stakes with minimal tax leakage.
Both Yahoo and AOL shares initially surged over 3.5% on the news.
Starboard also mentioned what other investors and analysts have described as a “value gap,” where Yahoo’s core advertising and search businesses are valued at less than zero, once you exclude its Alibaba and Yahoo Japan holdings. In Starboard’s words:
Even after the previous ill-timed and tax-inefficient sales of Alibaba stock, Yahoo’s remaining stake in Alibaba is currently worth more than the entire enterprise value of Yahoo. When adding Yahoo Japan, these two minority equity interests are worth approximately $11 billion, or $11 per share more than the current enterprise value of the Company. This is before ascribing any value to Yahoo’s core business, intellectual property, or real estate holdings, and clearly shows the dramatic valuation discrepancy that currently exists at Yahoo.
Starboard’s analysis assigns a value of $6.5 billion to Yahoo’s “core assets,” at a multiple of 5.5x EBITDA. They also criticized Mayer and her team for making big acquisitions in startups like Tumblr, which Yahoo bought for $1 billion. The activist investor said such deals were done at “massive valuations with seemingly little to no regard for profitability and return on capital.”