Yahoo’s Core Business Nearly Worthless As Alibaba IPO Comes Closer

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There has been a lot of buzz about Alibaba lately. Their upcoming IPO is set to make a few people billionaires and many more millionaires. It may in fact be the biggest IPO ever in recent history. Analysts estimate the company is worth between $136 to $250 Billion. Within technology companies this puts Alibaba’s worth below Apple, Google and Microsoft and on the lower end, just under Facebook and Qualcomm.

For those not familiar with Alibaba, it is the Chinese version of Google, Amazon, Ebay, and Youtube combined. Among its early investors include Japanese based Softbank and Yahoo. Softbank CEO and founder Masayoshi Son recently bought Sprint in the United States and is looking to also acquire T-Mobile. Son was an early investor Yahoo and owns the majority of Yahoo Japan. Son was instrumental in also convincing Yahoo to invest in Alibaba. In 2005 Yahoo invested $1 billion in Alibaba for a 40% stake.

Softbank currently owns ~34% of Alibaba and Yahoo owns ~23%. In 2012 Yahoo owned closer to 40% of Alibaba. But tensions between Yahoo and Alibaba soured and the Chinese giant purchased half its stake back for approximately $7.6 billion. Yahoo took some of this money and returned it back to investors and bought out activist investors like Daniel Loeb. The rest of the money funded Marissa Mayer’s shopping spree on startups including the $1 billion purchase of Tumblr.

Alibaba paid Yahoo $561 million in 2012 to license its intellectual property, the filing said. Alibaba is not required to pay licensing fees to Yahoo following the IPO. Last year, the Chinese company also bought patents from Yahoo for $70 million. Yahoo’s remaining 523.6 million shares in Alibaba are currently valued at $26 billion. Yahoo is required to sell 208 million shares in the IPO, worth $10.4 billion based on current estimates.

Yahoo’s stake in Yahoo Japan is valued at $9 billion. Added with the $26 billion Alibaba stake, this comes out to $35 billion. Yahoo’s total market cap is $36.7 billion, meaning it’s core business it worth less than $2 billion. If the Alibaba IPO exceeds expectations Yahoo’s core business could indeed be worthless.

Yahoo’s valuation is primarily based on investments it has in other companies such as Yahoo Japan and Alibaba. Marissa Mayer has not been successful in turning Yahoo around yet and she may want to reconsider her posturing with Microsoft over Bing. For a measly $2 billion someone is likely to acquire Yahoo.

Source: WSJ

 



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Suril is a scientist, journalist and obsessive Microsoft observer. He holds an advanced degree in Biotechnology with minors in Biochemistry, Microbiology, and Molecular Biology. Send him tips on twitter: http://www.twitter.com/surilamin

  • blackjesus

    So maybe if you translated this to Klingon it might make some sense to me. I have no idea how this is a problem for yahoo.

    • poken1151

      This may be the blind leading the blind, but what I gathered is this: Yahoo has a stake in Alibaba, when the IPO goes through, that will account for about 94.5% of their total worth, meaning the rest (their core business) is now very small for the company as a whole.

      So small, it may be considered insignificant, if insignificant, maybe worthless, if worthless maybe they may change trajectory because of it. I dunno, that’s what I got, someone please correct me on this if not.

    • Bugbog

      Yahoo’s current (and recent) market stock share price has been based on it’s ownership of stakes in foreign companies which have been doing well, prior to their IPO’s (IPO’s are essentially periods when owners of stock in private companies can cash those shares by selling them on to the general public).

      Once Yahoo sells the majority of those shares in the IPO the question will then be: will it’s own shares (which make up the valuation of its market cap, @ $36B) still retain retain their value? Or will investors, once the money from the IPO has been paid to them dump Yahoo’s stock, seeing as there will likely no longer be another payday coming to them!?

      • Tips_y

        In addition, if the Alibaba IPO will be disappointing (prices lower than expected/present valuation), this will result in driving down valuation for Yahoo itself since it’s tied to their ownership of shares in other companies rather than their own core business. In case the IPO is disappointing, Yahoo will need to sell big chunks of their shares at lower prices, and their remaining shares will have lower valuation, which will result in Yahoo’s valuation plunging down.

        I think this is what is meant by “between the devil and the deep blue sea” or “damn if you do, damn if you don’t” – really a result of Yahoo’s worth being associated with other companies. If they sell those shares even at great prices, down go Yahoo’s worth; if they sell at lower their present worth, then Yahoo could be practically worthless.

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