Yahoo’s new beginning

23rd May 2012

If there was ever a tech giant in the market for good news at the moment, it would be Yahoo. Its week began much better than for Facebook in that regard.  The sale of half of Yahoo's 40 per cent stake in Chinese e-commerce giant Alibaba back to the company for $7.1 billion has been a nice place to start.  Yahoo gets $6.3 billion in cash and $800 million in preferred Alibaba stock. Although, after tax it'll be left with around $4.2 billion.

New Regime, new cash

The deal is being talked up by some analysts as a ‘new beginning' for Yahoo, coupled with the resignation of the Computer Science-deficient CEO Scott Thompson earlier this month.  

Colin Gillis, an analyst at BCG partners went as far as to give Forbes 10 reasons for a bullish outlook on Yahoo. Going from ‘hold' to ‘buy', he's revised the $18 target share price to hit $20 within the next 12 months, up from its current at just below $16. The last time a Yahoo share fetched $20 was four years ago.

But the rah-rah tendency behind the newfound cash flow is being tempered with a cautionary reminder that, for some, Yahoo's main problem is that it has no primary focus; that it does too much, and none of it particularly well. This has allowed competitors like Google and Facebook to dominate the online advertising marketplace, for example, at a time when the space is actually expanding.  

Martin Pyykkonen, internet analyst at Colorado-based Wedge Partners points out that most of the $4.2 billion will go to shareholders, instead of being invested in acquisitions or licensing partnerships that will help Yahoo out of its current strategic mess.

That decision has brought mixed reactions, but after the rollercoaster ride that has been the lot of the Yahoo investor – over the last five years in particular – they probably feel a certain sense of entitlement. Other shareholders won't be happy until Yahoo Japan has been hived off too, which along with the Alibaba stake were considered Yahoo's most profitable assets.

How to Spend it

Here are some alternative suggestions for disposing of its Asian windfall.

Go shopping:  In January Bloomberg reported Yahoo's apparent intention to go on a shopping spree once the sale of its Asian assets came off. The list included the Weather Channel, online health information site WebMD, the travel website TripAdvisor and online car vendor Autotrader.  

Focus on digital media properties:  Yahoo interim CEO Ross Levinsohn's background is in digital media: as a former head of interactive media at NewsCorp, he was close to the media giant's $580 million acquisition of MySpace in 2005. While that particular foray no doubt taught its own painful lessons, there's no denying Levinsohn is versed in the areas Yahoo operates in and may have some ideas that'll shore up both the company and his bid to become fully-fledged CEO by June.

Top up the Facebook lawsuit fund:  If Yahoo insists on going all the way with the patent infringement lawsuit it brought against Facebook, then it's now got the bankroll to do it with. Alternatively, Yahoo could drop the suit, pay off the lawyers and keep the change.

 

More on Mindful Money

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Facebook stock struggles prompt Wall Street finger pointing

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