On Sunday night, I sent a 99-page presentation to Yahoo!'s (YHOO) Chairman with our analysis of the problems that the company faces and a suggested path forward.
The report was released last night and has generated a lot of discussion.
The intent of the report was to generate a more in depth discussion between Yahoo! shareholders and the company about its available options. I think it was successful.
Prior to the release of the report, we only had two options.
First was the one presented by Yahoo!'s board last week of going forward with spinning off the core business and Yahoo Japan stake from the Yahoo! entity, which would continue to house the Alibaba (BABA) shares and a smaller business. Then there was the option to sell the business outright. That's the one put forward by Starboard Value.
I can understand Starboard's logic of wanting to see a sale of the business now, but I believe it's important to have a more in depth discussion of the pluses and minuses of these two approaches as well as other possible options.
Our plan includes the option of turning around the core business and the potential value that could create. We also detailed the benefits of Yahoo! bringing in a partner such as Liberty Media (LMCA) to help in the restructuring of the core business, but also with suggestions on how to best deal with the value of the two Asia stakes in the most optimal way for shareholders.
There are opportunities and risks with each approach.
The approach of Yahoo!'s board's seeks to minimize the taxes paid by the company while forcing the market to more properly value the core business. But there is a decent chance that a year from now Yahoo! won't be able to pull off the intended spinoff -- either because of the possibility the government may choose to tax the Alibaba stake (which is small) or that it might not allow the Alibaba stake to sit in Yahoo! with a small business that the company is planning to put there.
Starboard's approach seeks to minimize the taxes paid out by selling the core today for a value that might be higher than what shareholders could get in the future (as Yahoo! presumably deteriorates). By selling now, Starboard hopes that would precipitate SoftBank, Alibaba -- or both -- to buy up the shares of Alibaba and Yahoo Japan left behind from the core business. The risk, however, is that Yahoo! isn't allowed to leave behind the Yahoo Japan and Alibaba stakes.
Another unspoken option is that all this discussion provokes Alibaba, SoftBank or both to come in and buy all the pieces in Yahoo! today, or orchestrate some complex three-way purchase of the assets between Alibaba, SoftBank and perhaps some third-party such as Verizon (VZ), which would take the core. The risk there is that it's too difficult to make three elephants dance together, as well as the Yahoo! board.
Our approach is to turn around the core now and increase EBITDA substantially as well as the multiple the market assigns to Yahoo! on a normalized level. We also want to see a company, like a Liberty, brought in to help with that and the stakes. The risk with this approach is that the core is unravelling much faster than anyone expects -- faster than the costs that being cut. There's also a risk that a firm such as Liberty would demand too much in a deal and thus penalize Yahoo! shareholders.
Is it complex? You bet. That's why these Yahoo! directors are compensated to work on behalf of shareholders.
One thing is clear, though: there are no quick fixes here.
Each approach has upside and downside. Yahoo! needs to find the best risk-adjusted return available.
I believe the best likelihood of success for Yahoo! is if we get all this information out on the table for consideration.
