"Yahoo is over in our eyes," BGC stock analyst Colin Gillis wrote a few days ago. Yes, it's true that Yahoo is closing in on a sale of the web parts of the company we've known since the 1990s. But it would be so un-Yahoo for the company's sad, twisted tale to end with such a clean resolution.
Instead, this may be the start of the Zombie Yahoo era, with just as much potential complexity as the last throes of living, breathing internet Yahoo.
Even if the company's operating parts are sold, a shell of Yahoo will live on to figure out what to do with the nonoperating parts of the company. Those are principally stock holdings in two Asian internet companies -- Chinese e-commerce giant Alibaba and Yahoo Japan, an independent web firm that shares a name with the U.S. internet company.
Yahoo's previous management had the prescience to make the Asian investments, which have soared in value. Yahoo's roughly 15 percent holding of Alibaba stock and 35.5 percent of Yahoo Japan's shares have a combined market value of about $40 billion.
If the web parts of Yahoo are sold to Verizon or another new owner, a Yahoo skeleton crew will have to stick around to figure out how to maximize the value of the Alibaba and Yahoo Japan stakes. There are two thorny problems: One, it's unclear whether there will be a huge tax bill when Yahoo sells those stock holdings. And two, there are few obvious buyers for those stakes, which limits the potential upside.
Both Alibaba and Yahoo Japan are publicly traded, but Wall Street's all-over-the-map estimates of Yahoo's holdings show the complicated valuation dynamics. Some stock number crunchers assume a 35 percent capital gains tax rate if Yahoo sells its stakes in both, while others figure Yahoo will owe taxes only on a sale of the Yahoo Japan shares. Others figure Yahoo will have to take a discount of 10 to 15 percent from the market values of both given the lack of liquidity.
Remember that Yahoo has proved to be unreliable when it comes to tax assumptions. The company was forced to seek a sale of its web operations after investors lost confidence that it could win IRS approval for a tax-free spinoff of its Alibaba shares.
Apart from taxes, the biggest complication is a dearth of potential buyers for the Asian investments. Softbank owns 43 percent of Yahoo Japan, according to Bloomberg data, which makes Masa Son's internet-and-telecom conglomerate a natural buyer for Yahoo's 35.5 percent stake in Yahoo Japan. The problem is that Softbank is not exactly flush with cash at the moment.
On Monday, Softbank announced plans to spend $32 billion to buy chip-design company ARM Holdings in the surprise deal of the summer. The company plans to borrow $9.5 billion to pay for it. Softbank is also shedding assets to try to fix the ugly debt bomb at Sprint. Softbank investors might not be keen on the company spending what could be more than $8 billion on the Yahoo Japan shares.
Likewise, Alibaba is the logical buyer for Yahoo's shares in the Chinese company. But Alibaba CEO Jack Ma is known to drive a hard bargain, and Alibaba executives have said they would buy back the company's stock only if it benefits shareholders.
There's no rush for Zombie Yahoo to figure out the best way to cash out its Alibaba and Yahoo Japan shares. The skeleton crew can bide their time until they can get the richest possible price for Yahoo's weary shareholders. Yahoo has essentially been in the business for years of trying to figure out the best way to turn its paper profits on Alibaba and Yahoo Japan into shareholder cash. A sale of the operating businesses at Yahoo don't change that reality. The sale will simply mean Yahoo formally shifts into a brain-eating land of the living dead.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
I have converted Yahoo Japan's market value into U.S. dollars. Alibaba's stock market value was as of 3 p.m. ET on Monday.
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