Activist investor Starboard Value LP has sent a letter to Yahoo (NASDAQ:YHOO) CEO Marissa Mayer urging her to combine Yahoo with AOL (NYSE:AOL)). Starboard said the deal will help the companies navigate the ongoing challenges such as growth of programmatic advertising and migration to mobile devices.
Assuming Starboard Value LP has at least a 5% stake in Yahoo, it should have at least a $2 billion stake in Yahoo in order to actively engage corporate executives and directors with their concerns and suggestions.
Stated in the letter that was sent to Marissa Mayer
- Yahoo should cut costs by $250 million to $500 million
- Stop acquiring start-ups that do not generate top line growth
- Sell Yahoo’s stakes in Alibaba ($33 billion) and Yahoo Japan ($7.7 million)
- Derived from current Market Capitalization
Starboard stated that a combination with AOL could deliver synergies of as much as $1 billion according to CEO Jeffrey Smith.
Why sell the whole cake?
The enterprise value of AOL as of today is valued at about $3.5 billion. That value is about 10% of what would then be the capital that solely comes from selling Alibaba (NYSE:BABA) shares. If this does occur, investors should be on their toes waiting for the dip in Alibaba shares if Yahoo sells their equity stake in order to make an acquisition. On top of that, if Yahoo sells their stake in Yahoo Japan, it would just decrease that 10% level even further.
Investors should be very attentive to see if Yahoo sells their equity interests and see how Ms. Mayer yet again has another decision to make investors happy with all of the extra capital.
Yahoo Undervalued?
Mr. Smith, CEO of Starboard Value LP said, “Clearly Yahoo is deeply undervalued relative to the sum of its parts,” Smith wrote in the letter, adding that the fund now has a “significant” stake in Yahoo. “We believe it is incumbent upon management and the board to take immediate steps in committing to remedy this valuation discrepancy.”
Mayer’s Mission
Mayer has been working since 2012 trying to get the Web portal to be a dominant player in the internet industry again. Since Alibaba’s IPO last week, pressure has been increasing from the amount of capital Yahoo gained from their stake in Alibaba.
As Yahoo gained more value from the IPO, the value of its core business stuck out like a sore thumb. The equity interest in Alibaba is valued more than Yahoo itself when looking at the Web Portal’s core online-advertising business laid bare.
Mayer has attempted to bring in revenue by acquiring startups and investing in content and services, but has not reaped the results that she has hoped for. In two years, Mayer has acquired about 22 companies accounting for 20% of Yahoo’s total acquisition history for 17 years since 1997.
Results
The idea of this deal and possible turnaround of Yahoo's recent direction is exciting for investors. Yahoo's stock rose $1.60, or 4.1 percent, to $40.55 in Friday's afternoon trading. AOL's stock added $1.36, or 3.2 percent, to $44.33 as investors reacted to a potential buyout bid.
After paying its taxes, Yahoo is expected to have an additional $6 billion in cash that could be used to buy AOL, whose current value is hovering around $3.5 billion. Yahoo has previously pledged to return about $3 billion -- half of its recent Alibaba windfall -- to its shareholders through stock buybacks or a special dividend.
Bottom Line
This is all the buzz in the mergers and acquisitions news on Friday and investors should be glued to Yahoo and AOL’s press release page to see if this merger actually does happen. There are many angles that investors can invest from but we will all have to wait and see what the outcome is in the coming weeks. We currently rank both Yahoo and AOL as a Zacks Rank #3 (hold).