Is Yahoo (YHOO) finally coming back to its woefully long-lost senses? Let's hope so.
The latest kink in the convoluted process that Yahoo has embarked on to save itself is to reportedly monetize all or a large part of its $17 billion worth of assets locked up in China and Japan. Many Yahoo shareholders and some Wall Street analysts have been advocating such a move to stop the bleeding at Yahoo and reverse the direction of its declining stock.
The erosion in the value of Yahoo's shares, from a 52-week high of $19 to a 52-week low of $11.09, have encouraged several groups, including private equity management firms, such as Blackstone Group (BX), and Alibaba's chief executive Jack Ma, to contemplate buying large stakes in Yahoo to gain control of the once-glorious Internet pioneer. That has lifted the price of Yahoo's stock, which closed on Dec. 22, 2011, at $16 a share.
If Yahoo does sell its its 40% stake in China's Alibaba Group, which analysts estimate to be worth $12 billion, and its 35% interest in Yahoo Japan, valued at about $5 billion, Yahoo's shareholders will finally realize the reason why they are in Yahoo's stock in the first place -- to make decent returns.
In fact, there's nothing wrong with Yahoo that good management and an imaginative and creative board wouldn't be able to resolve. In other words, what Yahoo basically needs are good leaders and experienced managers, which the company has been without for years now.
If Yahoo could realize $17 billion from selling the Asian assets, Yahoo would become one of the most undervalued stocks in the world of technology and the internet. That's because the $17 billion that would be generated from the foreign assets, plus the company's $2.8 billion in cash and equivalents, would equal Yahoo's market capitalization of about $20 billion. That means Yahoo shareholders would be getting Yahoo's search and display Internet businesses for nothing. That implies the stock is priced way below its real worth.
"This would be a great outcome for Yahoo shareholders," notes analyst Laura Martin of investment bank Needham, who figures the U.S. search and advertising businesses are worth about $4 billion, which she says may prove to be consevative. So she rates the stock as a buy with a 12-month price target of $19 a share.
The biggest issue is what the board would do with the proceeds from the sale of the Asian assets. The best case scenario, she says, would be to return and distribute the money to its shareholders.
Analyst Jordan Rohan of investment firm Stifel Nicolaus who, too, rates the stock a buy, says splitting off the Asian assets "is a key part of the solution to unlock shareholder value." But even with the sale of Yahoo's assets in China and Japan, the prospects of ardent suitors going after Yahoo won't be going away. Rather than discourage those who seek to capture Yahoo, the sale of the Asian assets might well encourage them even more as Yahoo by then would be cash-rich, which would make the stock very underpriced. Rohan pegs the odds of Yahoo being acquired outright at 75%.
Microsoft (MSFT), which had tried to acquire Yahoo in 2008 for more than twice its current price, might come back to the table if the Asian assets were sold, according to some analysts. It woud depend on how the assets are finally disposed of.
Scott Kessler of Standard & Poor's has reiterated his "strong buy" rcommendation on Yahoo in the wake of reports that the company could end up selling all or part of its stakes in Alilbaba and Yahoo Japan. He figures that without those assets, Yahoo is worth $11 a share. In its current form, Kessler puts Yahoo's value at $20 a share.
The sale of the Asian assets, if it happens, would finally put the real worth of Yahoo in proper perspective -- and define more clearly its future as a takeover play. Indeed, shareholders may finally be rewarded for their patience and faith in the hapless -- and wayward Yahoo.
