Among the most preposterous rumors about Yahoo!’s (NASDAQ: YHOO) potential sale is that private equity firm Silver Lake Partners and Microsoft (NASDAQ: MSFT) will take a 20% stake in the portal. What would they get for the minority interest? Probably nothing.
Microsoft supplies its search function to Yahoo! The deal gives Bing a much larger reach in the search industry than it would have alone. That effectively allows it to be in the number two spot behind Google (NASDAQ: GOOG). It is questionable though that the extra audience Yahoo! brings helps Bing much at all. Google still has 65% of the U.S. market. That position is dominant enough that the Yahoo! and Microsoft partnership is less useful than Steve Ballmer thought at first. Ballmer does not need a new contract with Yahoo! anyway. It would take years and billions of dollars for Yahoo! to build an independent search operation again.
Silver Lake would have to convince itself that a minority position in Yahoo!, which is not growing fast, is worth its consideration. Yahoo! may be able to add several billion to its balance sheet. But, what does that gain it? Yahoo! might use the money to buy back shares. Share buybacks usually do not create investor value, at least based on how stocks in companies with buybacks fare after the process begins. The money also would not give Yahoo! much M&A leverage. The cost to buy most major Web 2.0 companies is too high. Even with its stock down by half since its IPO, Groupon (NASDAQ: GRPN) has a market cap of nearly $10 billion. Most other Web 2.0 companies that have gone public also carry high valuations. So do those that have yet to go public.
A 20% ownership in Yahoo! gets the new owner very little, which means such a transaction will not happen.
Douglas A. McIntyre
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