The real Yahoo! can now stand up. Its $39-billion stake in the Alibaba Group, the Chinese e-commerce behemoth — accounting for about 85% of the market value of Yahoo! — has obscured both the weakness and the potential of the Silicon Valley stalwart. By spinning off the stake into a separate company, Yahoo! will be judged by its core Internet businesses.
But there may not be much time for strategies and deals to turn those core businesses around. When the spinoff is complete, Yahoo! may be more likely to become the hunted rather than the hunter, according to investors and analysts.
Moreover, Yahoo!, which has long been considered one of the technology world’s biggest messes, burdened by years of mismanagement, has improved under the two-and-a-half-year tenure of Marissa Mayer as chief executive. What once was a mishmash of businesses has become, in some analysts’ eyes, a more focussed company with a clearer vision of its future.
“I used to be very bearish on the prospects of what they could possibly do,” said Ben Schachter, an analyst with Macquarie Securities. “Today, while I’m not fully convinced that the turnaround can succeed, I’m more impressed than I was even six months ago.”
That may make Yahoo more attractive to shoppers. But others warn that the company has much more work to do, potentially deterring would-be suitors.
Without a doubt, the most important transaction involving Yahoo for the foreseeable future is the pending spinoff off the Alibaba shares, a stake Yahoo has owned for about a decade. By putting that stock, along with an unspecified though most likely unimportant operating business, in a subsidiary that will be given to shareholders, Yahoo will avoid paying up to $16 billion in taxes.
It is a step that Wall Street investors have demanded for years.
Yet shedding the Alibaba stake has deal makers talking about potential moves that extend beyond Yahoo itself. Even the company that Yahoo is creating to hold the Alibaba shares could eventually become a takeover target as well. And to many on Wall Street, the logical buyer might very well be Alibaba itself, which could reclaim the last of a stake that it first sold to Yahoo a decade ago.
Though an Alibaba spokesman declined to comment, executives from the Chinese company may address the issue when it reports quarterly earnings Thursday morning.
For the moment, Yahoo’s less likely to pursue huge deals of its own. Part of that is because it doesn’t have the enormous war chests of rivals: It has about $8 billion in cash and short-term securities, compared with the approximately $60 billion that Google holds.
And unlike other businesses that have spun off assets, Yahoo isn’t having its Alibaba subsidiary take on debt and pay out a dividend, money that could have helped finance more deals.
In a conference call with analysts on Tuesday evening, Mayer acknowledged that smaller deals would probably be in her company’s future. Such transactions would be more along the lines of Yahoo’s $640 million acquisition of the video advertising platform BrightRoll, which provided a crucial lift to an important business.
“Despite speculation to the contrary, we don’t consider larger acquisitions — Flurry, BrightRoll or Tumblr-sized or larger — unless they really align with mobile, video, native or social,” she said. “We will continue to be very disciplined in this regard.”
Several analysts said that it was likely that Ms. Mayer would continue to focus on integrating and developing Yahoo’s existing businesses and making them stronger, occasionally buying small companies to hire their engineers.
“My opinion is that she’s going to be doing less M&A,” said Sameet Sinha, an analyst with B Riley & Company. “Maybe more of an ‘acqui-hire’ sort of transaction if there are any deals at all,” he said, referring to acquisitions where the object is to gain a start-up’s executives and engineers.
Still, some investors and analysts have speculated on whether Yahoo will instead end up a takeover target itself. Part of that is because, intentionally or not, Mayer has made her company more digestible by planning the removal of the Alibaba stake.
Post-spinoff, Yahoo is expected to have a market value of under $10 billion — a more digestible amount for a private equity firm or another Internet company.
Indeed, one shareholder, the activist hedge fund Starboard Value, has already called for the company to merge its core businesses with AOL, like Yahoo, a onetime giant of the Internet. But that appears unlikely to happen anytime soon, with executives at both companies pouring cold water on the idea.
Nonetheless, others may still want to buy Yahoo. Private equity firms might be enticed by the $4 billion in free cash flow, or money before any financial obligations, that the company still generates. Or perhaps some other suitor would appreciate gaining Yahoo’s presence in display, search and mobile advertising — businesses that analysts estimate are still worth a few billion dollars.
One possibility might be SoftBank of Japan, which is already tied to Yahoo through the American company’s 35% stake in Yahoo! Japan, a business the Japanese telecommunications conglomerate controls.
But potential buyers have considered buying Yahoo in the past and walked away. And, some analysts say, there’s still not enough reward to justify the risk of paying for a company still in turnaround mode.
After all, Yahoo’s forecast for revenue in the first three months of this year fell below analyst expectations. To Brian Wieser, an analyst with the Pivotal Research Group, that shows the company is still far behind where it needs to be, raising serious questions about whether there’s enough to entice a buyer. “That’s a possibility,” Mr. Wieser said, referring to a potential takeover bid emerging. “But how far into the ground is the core business going to go first?”
Whether Yahoo has ultimately put itself in a position to be sold, the company’s executives say that they’re not focused on a sale, at least at the moment. “The reality is that we are fundamentally operating folks,” Ken Goldman, Yahoo’s chief financial officer, said in an interview. “We love what we do.”