Carol Bartz, former Yahoo! (NASDAQ: YHOO) CEO, was right about one thing. The only way to substantially improve margins was to fire thousands of people. A new owner, if there is one, will have little choice other than to repeat Bartz’s formula.
The rumor is that private equity firm Silver Lake Partners will try to buy Yahoo!. Shares of Yahoo! trade near $15. The board is unlikely to take less than $20 to justify a sale. Microsoft (NASDAQ: MSFT) offered $31 in early 2008, and the board might have convinced the world’s largest software firm to pay more. No one will ever offer more than $30 again. The business has deteriorated too much since then.
Most analysts think Yahoo!’s stake in China e-commerce firm Alibaba is worth $8 billion to $10 billion. That assumes that Alibaba will not wait out a new owner, until the desire to get a return on a Yahoo! buyout overwhelms patience. The same is true with Yahoo!’s share of Yahoo! Japan, which may be worth $3 billion. Softbank, the other owner of Yahoo! Japan, has no reason to rush a transaction. Silver Lake, or another buyer, could be left with noncore assets that it cannot sell at a reasonable price, at least not quickly. That means a strong return on investment could be years away. All of this said, Microsoft is still the most logical buyer because it has the balance sheet to tell Alibaba and Yahoo! Japan that it is in no hurry for transactions either. But Microsoft has not been mentioned as a possible suitor.
A Yahoo! buyer might only have to pay $10 a share once “noncore” assets are sold. That leaves a portal business that in the most recent quarter made only $190 million in net profit on revenue slightly down from last year to $1.23 billion. Revenue probably will continue to fall as Facebook takes more and more of the display advertising sector. Yahoo!’s chance to improve sales is low.
Those revenue and net income numbers would leave a new owner with the same problem Bartz faced when she took over the company. Cost cuts will affect net income much more than higher revenue. Yahoo! has 13,600 employees. Based on margins, it is hard to argue that the portal company can afford so many. Lay-offs are the only way to drive net income higher in the future.
Douglas A. McIntyre
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