Yahoo Missing Microsoft Bid Seen Willing After Bartz: Real M&A

Carol Bartz’s ouster is giving companies from Alibaba Group Holding Ltd. to Microsoft Corp. (MSFT) the chance to buy Yahoo! Inc.’s earnings virtually for free.

Yahoo, the most-visited U.S. Web portal, fired Bartz on Sept. 6, after less than three years as chief executive officer. Once an $80 billion company, Yahoo has fallen 89 percent as it lost Internet users and advertising revenue to Google Inc. (GOOG) and Facebook Inc. Bartz, hired after Yahoo rejected a $47.5 billion offer from Microsoft in 2008, failed to stem the declines and left the company with just $16 billion in market value.

While Yahoo’s revenue has declined in the past two years, its cash and investments in Alibaba Group and Yahoo Japan Corp. (4689) account for about 80 percent of the company’s capitalization, according to Gabelli & Co. Putting Yahoo up for sale could entice Alibaba Group Chairman Jack Ma, who may want to regain the stake he sold six years ago, as well as Microsoft and AOL Inc. (AOL), according to Jefferies Group Inc.

“They’ve got to sell the company, break it up, do something,” Brett Harriss, an analyst with Rye, New York-based Gabelli, said in a telephone interview. “Many would argue that Alibaba Group is the majority of the value of Yahoo. Ma certainly knows Alibaba Group better than Yahoo and so he’s in a position to make a pretty good bid. There’s enough value there that something’s got to happen.”

Kim Rubey, a spokeswoman for Sunnyvale, California-based Yahoo, didn’t respond to an e-mail or telephone call seeking comment on whether it would consider selling itself.

‘No Fast Fixes’

Yahoo may sell its stakes in Alibaba Group and Yahoo Japan instead of putting the company up for sale, according to a person familiar with the thinking of Yahoo’s board, who wasn’t authorized to speak publicly.

“There are no fast fixes,” Colin Gillis, an analyst for BGC Partners Inc. in New York, said in a telephone interview. “There are plenty of assets on the book, but freeing those assets is a lengthy process and it has risks.”

Shares of Yahoo climbed 5.4 percent yesterday after Bartz, 63, who took over as CEO in January 2009, said in a memo to staff that she was terminated by Chairman Roy Bostock.

Yahoo said in a statement that Chief Financial Officer Tim Morse would become interim CEO, replacing Bartz, and decided to review options for its businesses.

Founded in 1994 by Jerry Yang and David Filo at Stanford University, Yahoo aggregates news, offers free e-mail and provides services that help users do everything from finding a new house to landing a date. It also competes with Google for users searching the Internet for information.

Internet Search

Once the dominant search engine, Yahoo’s share of the U.S. online ad market is now projected to drop to 9.7 percent next year from 16 percent in 2009, according to New York-based firm EMarketer Inc. Mountain View, California-based Google’s will climb to 45 percent, while Facebook will more than triple its portion of the online ad market to 7.8 percent.

Yahoo’s sales last quarter fell short of estimates as an overhaul of the U.S. sales force made it harder to close deals and slowed growth in advertising for banner ads and video clips. Bartz said at the time that sales were held back as more employees left during the overhaul than Yahoo anticipated.

Under Bartz, shareholders of Yahoo also lost out to Google. The owner of the world’s largest Internet-search engine advanced 66 percent, almost doubling the Standard & Poor’s 500 Index’s 34 percent gain. Yahoo rose just 6.7 percent.

Youssef Squali, a New York-based analyst at Jefferies, said in a report to clients yesterday that Bartz’s departure means that Yahoo will sell itself before a permanent CEO is announced.

‘Daunting Task’

The company faces a “daunting task” in attracting a capable successor, while investors may be unwilling to wait for a turnaround under new leadership, he said.

“They’ve had a number of years to try to play out their business model, and it doesn’t appear to be gaining much traction,” Jack Ablin, who helps oversee $60 billion as chief investment officer for Chicago-based Harris Private Bank, said in a telephone interview. “The time for Yahoo to be picky is over. Yahoo may be forced to take what they can get.”

Gabelli estimates that Yahoo’s Asian assets and its cash are worth almost as much as the company itself.

Yahoo holds about 40 percent of Alibaba Group, China’s biggest e-commerce company. Through that investment, Yahoo owns stakes in Taobao.com, China’s largest Internet shopping site, and Alibaba.com, which offers e-commerce services for businesses.

Sum of Parts

Using earnings estimates for 2012, Gabelli’s Harriss said the Alibaba businesses are worth $3 a share, while Yahoo’s 35 percent ownership of Yahoo Japan, the Tokyo-based operator of Japan’s most-visited web portal, is valued at $5.22 a share.

Add Yahoo’s cash and the pieces may be worth about $11 a share -- without accounting for its U.S. operations, based on Harriss’s sum-of-the-parts analysis.

Di Zhou, a Santa Fe, New Mexico-based analyst at Thornburg Investment Management, which oversees about $80 billion, is even more bullish and estimates Yahoo’s Asian investments may sell for more than $15 a share. The stock ended yesterday at $13.61.

The valuation gap may persuade Alibaba Group’s Ma to acquire Yahoo to regain the stake that he sold in 2005 as Internet use in China surges and Taobao.com mulls a public listing, according to Herman Leung, a San Francisco-based analyst for Susquehanna International Group LLP.

Taobao.com accounts for 90 percent of China’s consumer e- commerce market, which may generate almost $100 billion in transactions this year, according to Michael Clendenin, managing director at research company RedTech Advisors in Shanghai.

Alibaba Bids

Bartz had turned down Alibaba’s bids to buy back stock held by Yahoo, saying she wanted “the most value” from a deal.

Susquehanna’s Leung says that Alibaba Group’s Ma could team up with private equity firms to buy Yahoo, with the buyout firms retaining its U.S. operations.

“Jack Ma has made it no secret that he wants that stake back,” Leung said in a telephone interview. “It makes a lot of sense. There’s an option to buy the whole company with private- equity support.”

John Spelich, a spokesman for Alibaba in Hong Kong, didn’t immediately respond to an e-mail seeking comment.

Redmond, Washington-based Microsoft, which can buy Yahoo at less than half what it offered in 2008, may also be interested, Leung said. AOL, the New York-based Internet company that’s suffered almost $800 million in net losses in less than two years, could partner with Yahoo as well, according to Laura Martin, an analyst at New York-based Needham & Co.

Shareholder Interest

Jennifer McCarthy, a spokeswoman for Microsoft, said it doesn’t comment on rumors or speculation. AOL’s Graham James didn’t immediately respond to a telephone call or e-mail seeking comment.

“The board is definitely under some pressure to show that they’re actually acting in shareholder interest,” Ken Sena, an analyst at New York-based Evercore Partners Inc., said in an interview yesterday with Tom Keene on Bloomberg Television’s “Surveillance Midday.” “The fact that they made this announcement without a CEO in mind signals they are open to possibilities. I’m sure that a breakup or sale is among those.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.

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