Yahoo opens up the Alibaba vault

The cash infusion is desperately needed by the flailing Internet company, but nothing else about Yahoo's future has changed with this deal.

By MSN Money Partner May 22, 2012 1:08PM

By guest columnist Peter Pham


It looks like Yahoo (YHOO) has finally figured out the magic word to get Alibaba to open up the piggy bank and turn Yahoo's investment into cash. The details of the deal between the two companies are convoluted, but most likely Yahoo will realize $7.1 billion from the sale of half of its 40% stake in Alibaba.


Long-suffering shareholders will be the beneficiaries of this deal, as opposed to Yahoo's plowing the money directly into an overhaul of the flailing Internet search company's business model. 


Yahoo had to get this deal finalized to stave off a full-fledged investor revolt after the debacle over former CEO Scott Thompson's departure. The announced use of funds from this deal makes Yahoo more of a venture capital play than an internet advertising company. Yahoo's remaining stake in Alibaba plus the 35% stake in Yahoo Japan are its two remaining valuable properties.


Consider Yahoo a Sears Holdings (SHLD) without the shopping mall presence.


Behind on the technology curve, Yahoo still has to make at least one more deal to get the operating capital it needs to effect a company transformation. The main problem is that contextual advertising is losing ground to behavioral advertising facilitated by Google's (GOOG) back-end direct bidding advertising platform.


While Facebook (FB) is making headlines with its disastrous IPO, it is in a good position with its highly sticky user base to find a path to revenue that isn't Zynga (ZNGA) games. 


The challenge will be to monetize those users without alienating them. The bearish case is predicated on the ease by which people could abandon Facebook if they become any more hostile to users being social in a way that pollutes their precious data pool, their most valuable asset.


Yahoo still functions on a television and radio model of advertising, driving the content to you as opposed to you driving the content. It's a dead model walking. No amount of cost-cutting, which is part of their current plan, will save that revenue model. One day, users will just stop using their Yahoo accounts and switch to one that directly supported by their mobile ecosystem of choice.


Even though the resolution of Alibaba is a positive to support the current price, it does nothing to offset the lack of future growth. This is a push in terms of valuation. Share price will rise on the buyback, but the longer term prospects have not been addressed. Having $2.6 billion in cash and zero debt are only useful if there is a plan associated with those assets. The two most likely paths forward for Yahoo are (1) a buyout by Microsoft (MSFT) or Google now that Microsoft's Bing has real market share for search or (2) as a content provider reborn selling content to platforms like Facebook, but that seems unlikely. (Microsoft owns and publishes Top Stocks, an MSN Money site.)


Looking at M&A scenarios, Yahoo is probably worth more sold off piecemeal than as a full company.  And this deal with Alibaba may be the beginning of that process. A number of analysts have concluded that Yahoo is fairly valued based solely on its stake in Alibaba and Yahoo Japan at a market cap of $19 billion.


We believe the valuation of these Asian assets at $13 to $14 per share is accurate from what we see here on the ground in Southeast Asia. However, we have concerns that this is a value trap until such time that serious discussions of an exit strategy, either whole or in parts, look imminent. As an investor you have to believe that management can execute these sales quickly and at premium valuation or you are sitting on dead money, especially at 15 times forward earnings in a falling market. 


The proof of Yahoo's fading relevance is in the universality of its passport. Until a Yahoo account opens the same number of doors as a Google or Facebook account or management gets better than fair value from asset sales, nothing about Yahoo's future has changed with this deal.


Peter Pham runs, a research and trading site in Ho Chi Minh City, Vietnam, that focuses on emerging Asian markets.

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