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Private Equity wants Yahoo by Jordan at Investing Blog

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The Wall Street Journal reported that at least three companies, AOL, Silver Lake, and Blackstone are all considering a play on Yahoo to take it private. The company, which was first offered $33 a share some two years ago by Microsoft is in a prime position for a sale. At the time, CEO Jerry Yang turned down several hostile offers by Microsoft, only to watch the stock slide precipitously by more than 60% in the weeks that followed.

The New Deal

According to the Wall Street Journal and new sources since the deals were first leaked, a sale of Yahoo would be contingent first on liquidation of its position in Alibaba, the Asian internet portal, retailer, and international trading giant.

Yahoo first got involved in Alibaba when it sold its Yahoo China portal to Alibaba and exchanged $1 billion cash for 39% of the business in 2005. The deal proved to be one of the best transactions ever to appear on the Yahoo books, though reports have since surfaced indicating plenty of lost love between the two firms. The two have long been at odds over the direction of Alibaba’s numerous smaller internet investments.

Run! It’s AOL

Anyone who can remember AOL’s purchase of Time Warner at the height of the internet bubble should have reason to appreciate the rationale behind running away from anything AOL. Time Warner proved to be a horrible investment for AOL and over the course of a few years both companies were left in financial ruin. AOL failed to grow its business beyond dialup, which is now extinct in most places around the United States and the cost of the buyout threatened the bottom line of both businesses.

AOL, much like Yahoo, has failed to figure out where it fits in the world of line media and services. The company has tried its hand at everything from an internet service provider, to a web portal and even attempted a failing advertising business that Google has dwarfed.

Where’s the Profit for Private Equity

The private equity interest does make sense here. With a new CEO, Yahoo has trimmed costs and increased profit margins in a time when ad spend in any media (especially display advertising) is slowing considerably.

There is upside, however. A private equity firm, at today’s price, could take Yahoo private during the worst time for advertising in decades. Following any recovery, and some necessary reorganization, the cost of business should dip while advertising revenue rises to match the global economy. This is a highly leveraged company as it costs no more for Yahoo to serve advertising at $.01 per visitor than it does to serve them at $.001 per visitor, despite a 1000% change in topline revenues.

Yahoo has, in one day apparently, hired Goldman Sachs to help it thwart private equity offers and hostile takeover attempts. It is really a shame too, because this company needs overhaul and investment that probably only Bain Capital and its consultants could provide.

Sell, Yahoo! Sell! Let it go. These are the days of Google. If I were a shareholder, I’d be launching a proxy war soon enough to get a deal going.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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