Yahoo Stock: This Is Why Warren Buffett Is Interested in Yahoo! Inc.

Warren BuffettWill Warren Buffett Bid for Yahoo?

Normally, you wouldn’t find Warren Buffett shopping in the Internet sector. So what is he doing with Yahoo! Inc. (NASDAQ:YHOO) stock this time?

Over the weekend, it was reported that the billionaire investor might be backing up Quicken Loans Inc., a group bidding for Yahoo’s core assets. Not long after, Buffett confirmed to CNBC that this would indeed be a possibility. (Source: “Warren Buffett: I May Help Bankroll Billionaire Dan Gilbert’s Bid to Buy Yahoo,” CNBC, May 16, 2016.)

“I’m an enormous admirer of Dan and what he has accomplished in Quicken Loans‎,” Buffett said in a statement. (Source: Ibid.)

The billionaire investor was referring to Dan Gilbert, chairman of Quicken Loans. Gilbert is in the second round of bidding for Yahoo’s Internet assets. Recode reported that Gilbert had former Yahoo executives Dan Rosensweig and Tim Cadogan advising him on the bid. (Source: “Top Ex-Yahoos Are Advising a Buffett-Financed Group in a Bid for the Company,” Recode, May 14, 2016.)

Note that although Buffett is willing to back up the potential deal, he is not going to be an investor in Yahoo stock. His favorite investments still lie in consumer goods, insurers, and industrial companies.

As a matter of fact, he is very clear about that: “Yahoo is not the type of thing I’d ever be an equity partner in. I don’t know the business and wouldn’t know how to evaluate it, but if Dan needed financing, with proper terms and protections, we would be a possible financing help,” said the billionaire investor. (Source: CNBC, op cit.)

So, what Buffett would invest in is more like Yahoo’s debt. In fact, he has provided financing to quite a few acquisitions in the past. For instance, when he backed Mars Inc.’s deal for Wm. Wrigley Jr. Co., he bought $4.4 billion worth of bonds paying 11.45% interest. (Source: “Is Buffett Jumping Into WebStocks with Yahoo Deal? Not So Fast,” Bloomberg, May 15, 2016.)

Providing financing to deals like this, with good terms and protections, is a great way for Buffett to invest in a field that he said he’s not familiar with. Of course, for him to benefit from Quicken Loan’s potential acquisition of Yahoo, there is one condition—Yahoo has to stay in business.

Let’s admit it, Yahoo is not what it used to be. While it certainly helped us embrace the World Wide Web and e-mail service, it has been losing business to search engine giant Alphabet Inc (NASDAQ:GOOG) as well as newcomers like Facebook Inc (NASDAQ:FB).

However, Yahoo is not over just yet. More than one billion people are still using Yahoo’s e-mail, finance, sports, and video sites every month. These kinds of traffic numbers make Yahoo’s core assets very attractive for any company that wants to expand its web presence.

In particular, someone within Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) believes Yahoo could do much better if it becomes part of a larger organization.

“I hope the next owner can do something to revitalize the spirit of the core things that made Yahoo very, very unique and create a distinction in consumers’ minds about why they love Yahoo still. It will be helpful if it is private or part of a much larger corporation to achieve that,” said Susan Decker, who is a director on Berkshire’s board. (Source: “Exclusive: Warren Buffett, Quicken Loads Founder in Yahoo Bid-Sources,” Reuters, May 14, 2016.)

What’s more is that Decker probably knows Yahoo better than most. Before her directorships at Berkshire and a number of other companies, Decker held several senior positions at Yahoo, including president and chief financial officer.

The Bottom Line on Yahoo Stock

Yahoo’s core assets have their appeal. Buffett believes the company can stay in business and is willing to finance Quicken Loans’ second-round bid. But let’s not forget that there are other bidders out there for Yahoo as well.

One of them is telecom giant Verizon Communications Inc. (NYSE:VZ), which spent $4.4 billion buying AOL, Inc. last year. In contrast, Yahoo represents a much bigger opportunity as its userbase of one billion people dwarfs AOL’s two million. Also, Verizon has put AOL CEO Tim Armstrong in charge of exploring the deal with Yahoo. What’s so special about Armstrong? Well, he and Yahoo CEO Marissa Mayer both worked at Google. The two have known each other for years.

When there are multiple buyers and just one seller, prices usually go up. That should be reassuring to Yahoo stock investors.