Yahoo! symbol design (Photo credit: Wikipedia)
Yahoo! just announced 2,000 job cuts.
Most people who are long Yahoo! (YHOO) - like me - would like nothing more than to see the company get acquired at a healthy premium. Any investor in any company would love to see it bought.
I'm in the small minority of investors who still likes Yahoo! here (and have for the last year and a bit). The majority view of Yahoo! is that it's "dead money," in a "death spiral," and in the "carcass phase." Those of that opinion think no one anywhere would ever want to buy Yahoo!
That's silly. There's always a potential buyer for anything in the capital markets - especially at a certain price.
I have no reason to think that new CEO, Scott Thompson, is trying to sell the company. I suspect he, like most CEOs, is trying to take steps that will put the company on sounder footing for its future growth. Today's job cuts are part of that effort.
I also think we're likely to hear in the coming weeks of the proxy fight that Dan Loeb also wants to see steps taken to assure the company's long-term future. That is why Loeb has forcefully spoken out in favor of Yahoo! keeping its full stake in Alibaba Group, if it can't negotiate a "fair" deal with Jack Ma for the stake.
So, with all that said, there is no chance that any potential bidder will buy Yahoo! until two things happen:
(1) Yahoo! cuts headcount and;
(2) There is some clarity around Yahoo!'s stake in Alibaba Group (and probably disposition of the Yahoo! Japan stake).
Here is a list of all the potential buyers of all of Yahoo!:
- Alibaba Group
- Microsoft (MSFT)
- News Corp (NWS)
- AT&T (T)
- Verizon (VZ)
- Comcast (CMCSA)
- Disney (DIS)
- CBS (CBS)
- Liberty(LMCA)
- Apple (AAPL)
If you were a potential buyer of Yahoo!, because you wanted the traffic and properties, would you want the company now with 14,000 full-time employees plus (as I said in a post last week) probably another 4 - 5,000 in full-time contractors - or with the number of people you are going to keep on? It's a terrible thing to cut jobs for the people affected, but Thompson has to get the optimal number of people working at Yahoo! I think 5,000 people need to be taken out of the company. Investors and potential buyers would like that number.
It's not any Yahoo! employee's fault that, despite all her tough talk, headcount always increased every year that Carol Bartz was there. Thompson has to make the cuts she should have made.
I'm expected we'll hear 2,000 cuts today and another 3,000 before the proxy contest shareholder vote which will likely be in June.
The second thing that needs to be cleaned up is clarity around the Alibaba Group stake. At the moment, Jack Ma is really the only potential bidder for all of Yahoo! and that's a longshot that he'd want to take that on with all the political risk that goes with it. However, I don't think that means the only solution to that uncertainty is for Yahoo! to sell its stake. How else could they show clarity for a buyer?
Yahoo! could sell back one-quarter of its 40% stake in Alibaba Group now. Ideally, they'd do this in a tax-efficient way but they could pay the taxes on this sale and it would still be worth it." They'd likely do this at a deep discount to what Alibaba Group would be worth if they IPO'ed today.
For example. Alibaba buys back a quarter of Yahoo!'s stake with a valuation for the Group of $26 billion. Yahoo! would get back $2.6 billion - or let's say $1.56 billion after taxes. They'd still own 30% of Alibaba Group, which all parties know is more likely to be worth $20 billion when it IPOs (meaning the Group would have a valuation around $66 billion).
What would Yahoo! get from Alibaba Group (besides $1.56 billion after taxes) for agreeing to this favorable deal now? Assurances that Yahoo! could hold the remaining stake until they IPO and timing of a Group IPO (e.g., no later than the end of 2013).
In my estimation, the market would greatly reward Yahoo!'s stock for this kind of clarity around the Alibaba stake. Furthermore, any potential buyer would take this as an all-clear on the status of that stake which they could plan around.
Of course, any buyer still needs to judge the "fit" of Yahoo!'s strategic assets with their needs. And many still might want to see how Thompson does in turning the tide to show revenue stabilization and then top-line growth.
However, the job cuts and clarity around the Alibaba stake are both necessary but not sufficient conditions before a full buy-out can happen.
[Long YHOO]
