What would you do if $10 billion in cash landed in your company’s lap? If you were Marissa Mayer, CEO of Yahoo, you’d be spending a lot of time fending off inane suggestions for how to use the money, most of them involving a slew of acquisitions (or one very sizable one). But NYU professor NYU Aswath Damodaran might actually have an idea worth listening to (outside of our own).
Damodaran’s idea is predicated on two things: his carefully reasoned valuation of Yahoo, which he estimates is worth more broken up into pieces. (The instrinsic value of Yahoo’s equity is $46.13 per share, he says, although the company is trading at $34 and change.) The second assumption: the obvious fact that, in his words, “Yahoo has lost the fight to Google and should concede gracefully.”
So what does Damodaran suggest? Ignore the calls to “do something quickly” with the projected capital gain from the sale of a stake in Alibaba, for one. In addition, Damodaran counsels to avoid throwing good money after bad by investing in Yahoo’s core business. Instead, Yahoo should curtail growth investments and run “itself as a mature business,” muddling along “as a mature company with stagnant revenues and stable margins,” he says. So why, then, would Yahoo be worth $46.13 a share? Obviously, due to its stakes in Yahoo Japan and Alibaba.
To get the stock higher, Mayer needs to get her finance team to “work on making the performance and the pricing of [Yahoo's] cross holdings more transparent to investors.” As Damodaran discovers in trying to value Yahoo, neither the holding in Yahoo Japan nor the one in Alibaba is consolidated, so they don’t show up in Yahoo’s operating numbers. More transparency would shrink the gap between Yahoo’s market price and its break-up value.
Certainly, Damodaran’s advice is a lot more reasoned and his idea a lot less risky than others that have been floated, such as to buy AOL, “another once-dominant Internet company that was outwitted by hard-charging innovators such as Google and Facebook” or, as a New York Magazine column offered, turn Yahoo into some kind of venture capital firm:
“With $10 billion or more, Yahoo could buy stakes in health-care start-ups, financial start-ups, transportation start-ups — any start-ups, really, whether or not they’re related to Yahoo’s existing business lines at all. Yahoo wouldn’t need to manage these companies or direct their strategies. … If Yahoo approached a few dozen innovative start-ups — probably foreign ones — and waved hefty term sheets in front of them, it might just work.”
(Never mind that the risk premium shareholders would demand would skyrocket, and countless other problems with such a business model.)
Although we like Professor Damodaran’s ideas, we think Yahoo shareholders would eventually get bored and vote with their feet. If Alibaba is so valuable, why not just hold that stock directly? We also think, as he astutely points out, that in the long run “Alibaba may be uncomfortable with Yahoo’s continued large stock ownership and find a way, legal or extralegal, to get Yahoo to sell.” Oops, there goes half of Yahoo’s value.
So what other paths are available to Mayer? Here are two more, since everyone seems to have an idea: one, put Yahoo on the block again. Pretty soon, whether initiated by Yahoo or not, someone with deep pockets is going to take advantage of Damodaran’s valuation numbers and the company’s escalating cash holdings — they will buy Yahoo and sell it off in pieces, thereby realizing the breakup value. Why not be proactive and try to get the best price before some hostile investor takes a proposal directly to shareholders?
The second idea is to use the cash to make a big bet (sorry, we couldn’t resist). The kind of acquisition we envision has worked for other companies, particularly, as we chronicled earlier this year, for Bloomsbury Publishing: buy a low-risk, profitable business or businesses with a steady stream of revenue. Bloomsbury cashed in its winnings from the Harry Potter series to “acquire 20 different businesses, almost all of them in academic and professional publishing,” as Bloomsbury’s CFO told reporter Marielle Segarra. In those markets, “you can publish a book and have it last for four or five years. And if you find a set of professors who adopt your books, you can have a very good business,” he said.
What would be the equivalent action for Yahoo? There’s the rub. There are very few low-risk, sustainable cash cows in high tech anymore, if there ever were. One possibility, though, is for Yahoo to use its cash for a move into the enterprise market. Why not buy a company like Box, which recently partnered with General Electric to provide its employees cloud-based file storage and management (and is most assuredly entertaining merger offers now that it has filed for an IPO)? It would be a bold move, for sure, and who knows if Yahoo has the chops to compete in business-to-business markets. In addition, Yahoo would just be opening a new front in the battle with Google, a war it long ago lost.
Therefore, we think choice number one is the way Mayer should go. Of course, it’s not realistic to expect a CEO to voluntarily liquidate a business that has a $4 billion revenue stream and very little debt. So we don’t expect to be taken seriously. But there are many crazier ideas out there, and on a purely financial basis, it sounds like the best for shareholders.
Photo: Wikimedia Commons, Mrgadget3000, CC-BY-SA-2.0-DE