Alibaba will buy back 20% of its shares held by Yahoo! (NASDAQ: YHOO). The consideration Yahoo! will get is $7.1 billion. That sum is “composed of at least $6.3 billion in cash proceeds and up to $800 million in newly issued Alibaba preferred stock.” The deal contemplates an Alibaba initial public offering that will, over time, allow Yahoo! to sell most or all of its remaining shares.
The announcement is a coup for Yahoo!’s interim CEO Ross Levinsohn, although the buyout must have been in the works long before he began his job earlier this month. What Yahoo! did not say as its reported on the agreement is what it will do with the money. That will be as crucial to Yahoo!’s share price, and perhaps its future, as anything the company has done in the past year — with the possible exception of changing CEOs twice.
Yahoo!’s market cap is just short of $19 billion, so the firm certainly could offer a dividend. That will not satisfy shareholders who have concerns about the viability of the portal company over the longer term. Yahoo! could buy back close to 20% of its shares and automatically raise its earnings per share. Shareholders may not be impressed with that move. Share buybacks rarely have been a way for shareholders to gain long-term value in troubled companies.
Beyond a these traditional uses of capital to enhance shareholder value are others that are more radical. One is a special dividend. Microsoft (NASDAQ: MSFT) did this in 2004. AOL (NYSE: AOL) plans to make a similar move with the just over $1 billion it got from the license and sales of some of its patents to Microsoft. Each was part of a plan to get cash on its balance sheet to shareholders immediately. The sum per share, however, in Yahoo!’s case would be relatively modest. Yahoo! has more than 1.2 billion shares outstanding.
If none of these is the route Yahoo! takes, the board and management are left with the option of making a quick M&A deal to enhance the company’s position as a content company. Yahoo!’s weakness in social media is obvious. But the $4 billion it has left after taxes may not be enough to buy a social media firm. Twitter, for example, has a valuation of at least $8 billion, based on the last time it raised money. If Yahoo! could raise additional cash to make an offer, a bidding war would ensue. Yahoo! does not have access to the capital necessary to win an auction. There are plenty of smaller social media companies, but not many that would make Yahoo! a force in the sector.
Yahoo! could also buy a large traditional media company and try to strengthen that company’s online presence. Yahoo! has the traffic to make such a plan work. Among the corporations it could afford is Gannett (NYSE: GCI), the largest newspaper company in the United States. It has a market cap of $3 billion. But, aside from Warren Buffett of Berkshire Hathaway (NYSE: BRK-B), who can afford to own newspapers as a hobby? Not a single analyst on Wall St. believes that papers have much of a long-term future.
Yahoo! is about to have a lot of money. Along with that will be a several options for what to do with it, none of which is terribly attractive.
Douglas A. McIntyre