Over the weekend Yahoo! (YHOO) finalized a deal to sell half of its long-standing 40% stake in Chinese e-commerce company Alibaba. The deal is valued at $7.1 billion -- $6.3 billion in cash and $800 million of newly minted Alibaba preferred shares.
The deal gives Yahoo! liquidity and a clarified mission, but it comes at a price. New Yahoo! board member Daniel Loeb recently cited reports valuing all of Alibaba at $63 billion. By that math Yahoo! just sold $12.6 billion worth of assets at a greater than 40% discount.
Yahoo! will also take a tax hit that would reduce the net proceeds of the deal to somewhere in the neighborhood of $4 billion, according to Kara Swisher at AllthingsD.com. As Swisher notes, this transaction implies an Alibaba value of $35 billion, or some $28 billion below Loeb's prior claim.
Whatever the final tally, Yahoo!'s press release says the company "intends to return substantially all of the after tax proceeds to shareholders." Yahoo! also announced an increase in its share buyback program by $5 billion.
If the proceeds are instead applied to further asset development or acquisitions the a discount on Yahoo!'s net was more than worth it. Interim CEO Ross Levinsohn has been focused on ad sales and content at Yahoo!. Though he wasn't behind the Alibaba deal (he's been at the post for a week), Levinsohn was one of Loeb's choices for Yahoo!'s CEO job. Levinsohn's ascension suggests a greater focus on original content which is arguably what Yahoo! does best.
Shares of Yahoo! were more active than normal on the news, with volume an hour into trading heavier than what's recorded on a usual full day. The shares have been between $15.10 and $16 following the Alibaba plan and were recently up 10 cents for the session at $15.52.
BlackBay Group's Todd Schoenberger thinks the sale is an excellent move for Yahoo!, saying it "improves the gravitas of the entire organization." Schoenberger says the success or failure of the deal will ultimately depend on how Yahoo! puts the money to work.
A more aggressive move into media is, in the words of Schoenberger, a "spectacular idea," but it's not Yahoo!'s only play. There are any number of compelling directions Yahoo! could go with its expanded war chest, the least compelling of which is using it to increase buybacks.
Yahoo's! core business is not and never will a Venture Capital or Private Equity shop. If the shares are as undervalued as Loeb suggests, it's because the Street not knowing where the company was going as a core business, not concerns over Yahoo!'s Asian investment strategy.
Between Loeb -- who owns 6% of Yahoo! stock -- getting three board seats, yet another change at the top and the Alibaba deal finally closing, Yahoo! seems to be getting proactive for the first time in years. Add to that the company's decision in April to cut roughly 2,000 jobs as part of its cost-cutting and refocusing efforts, and it's been an extremely busy few weeks for the Sunnyvale, Calif.-based company.
To shareholders and employees, any move is better than sitting still.
- Investment & Company Information