A possible takeover bid for Yahoo! is in preparation, according to the Wall Street Journal. In addition to rival AOL, private equity firms (Silver Lake, Blackstone) are looking at the company. According to Reuters, News Corp also has been approached by the private equity investors to participate in the bid. Yahoo! has a market capitalization of USD 20.6 billion and an enterprise value of USD 17.9 billion (this is lower due to its substantial cash position). However its value is largely locked up in a number of stakeholdings. If we leave these out, then AOL is not much smaller, with a market capitalization of USD 2.7 billion and an enterprise value of USD 2.4 billion. AOL already showed an interest for Yahoo in 2008.
A private equity offer makes sense for a number of reasons. The ingredients for interest from the likes of Blackstone include the following:
• Yahoo! is not running optimally and there have been rumblings about the qualities of CEO Carl Bartz. There is room for improvement here.
• Yahoo! has almost no debt, so its balance sheet can carry part of the debt needed for the takeover.
• Assets can be sold, such as the 40 percent stake in Chinese internet group Alibaba, which is worth around USD 10 billion, and the 35 percent stake in Yahoo! Japan, worth USD 7 billion. Yahoo! also owns the popular photo-sharing site Flickr and several other websites.
• A merger with AOL would offer a great deal of synergies.
Yahoo's share price rose 5 percent on the report and another 13 percent after the market closed, to around USD 17. A bid could still be well above that, such as the offer from Microsoft in 2008 of USD 31 per share, or a premium of 62 percent. Yahoo eventually rejected a sweetened bid of USD 33. While the bid is unlikely to reach that level this time, Yahoo may not be as likely to reject an attractive premium again. An obstacle is the need for a sale of the stakes in Alibaba and Yahoo! Japan; the respectvie partners of Alibaba and Softbank are the most likely buyers.
In comparison to the winners on the internet market - Google, Apple, Amazon, Facebook, Twitter and the capital-strong Microsoft - AOL and Yahoo! have been under intense pressure. While they still have strong brand names and a group of loyal users (websites, mail, chat), the income side is looking less good due to tough competition on the market for display advertising. A big but is that a merger of two weak companies does not always lead to a strong new company. The search deal between Yahoo! and Microsoft is still not a definitive success. In September, Google's market share in the US rose again, by 0.7 percent points to 66.1 percent, leading a 0.7 point drop at Yahoo (source: ComScore). Still a merger, with strong top management, looks obvious. With Yahoo's links with Microsoft on search, the cooperation could be further expanded.
