It’s no surprise that Yahoo! Inc. (NASDAQ:YHOO) is up for sale. In fact, that might be the only thing YHOO stock has going for it as of late. YHOO stock is up about 36% since mid-February on growing optimism among investors that the company is going to sell off its core assets or even the whole company outright.
But if a certain rumor is true, investors may have to wait a bit longer for that sale to happen.
On Wednesday, Re/code’s Kara Swisher reported that she has gotten her hands on a “book” that Yahoo has given out to prospective buyers, and it portrays a company that is in an extremely dire situation. (Source: “Secrets of the Yahoo Sale ‘Book’ Reveal Financial Meltdown and Big Bet on Mobile Voice Search,” Re/code, April 6, 2016.)
The book is made up of disclosure documents that sellers give to buyers so they can make an informed, intelligent bid. It offers detailed outlooks about items such as projected traffic acquisition costs and projected revenue in various business segments.
According to Swisher, the Yahoo book is “unusually confusing” and it shows a company that is in a serious free-fall that has potential buyers nervous about making a bid. (Source: Ibid.)
In one slide in the book, Yahoo is estimating that revenue will drop about 15% and earnings by over 20% this year. Revenue will fall from $4.4 billion in 2014 and $4.1 billion in 2015 and a lower $3.5 billion in 2016. Earnings will fall from $1.0 billion in 2015 to $750 million in 2016.
Another concern for a potential buyer is that traffic acquisition costs will likely rise from $875 million in 2015 to $1.0 billion this year and that they will continue to rise beyond that.
The book also discloses that Yahoo expects its workforce to decline to about 9,000 by the end of the year, which is down from 10,500 last year and 12,500 in 2014.
But perhaps the biggest concern for buyers is that there is a troubling lack of clarity. Buyers aren’t sure what is making money and what isn’t. (Source: Ibid.) Also perplexing is that some search staff costs have been put into research costs. Moreover, profit from regional units isn’t as detailed as some would like.
Additionally, CEO Marissa Mayer and others in top management have declined in meetings to give more detailed answers until buyers are approved for the next round of bidding. (Source: Ibid.)
So what does all this mean for YHOO stock shareholders?
Not much really. Much of what was revealed in the Yahoo “book” has been public knowledge for quite some time now. The revenue and workforce guidance was revealed during an earnings call in February. YHOO’s stock price didn’t move much on the news, so it’s safe to say that the information in the book is already reflected in the price of the stock.
Swisher also said that although some suitors are scared by the numbers, everyone that she spoke to still plans to make a bid. (Source: Ibid.)
So if you’re a YHOO stock shareholder, you might be rewarded nicely when a sale does happen.
According to Barron’s, there could be a lot more upside in YHOO stock. Barron’s believes that YHOO stock is trading at a deep discount to the sum of its parts, which is about $51.00 a share. (Source: “Yahoo Investors Should Soon See a Payoff,” Barron’s, March 29, 2016.)
Barron’s argues that YHOO stock is worth $43.00 a share in a break up and sale scenario and $45.00 a share if the company is sold in its entirety. If Yahoo is sold for somewhere in that range, that would represent a gain of about 16%–22% from today’s stock price of $36.17.
Yahoo has given potential suitors until April 11 to provide details on how they would finance the purchase, what conditions would have to be met on their end, and certain assumptions such as including plans to separate Yahoo’s core business from its other assets if necessary. (Source: Ibid.)
The news comes about a couple of weeks after activist hedge fund Starboard Value announced a proposal to entirely replace Yahoo’s board of directors with its own choices. Starboard argues that Yahoo’s current board hasn’t shown enough of a commitment to selling the company.
Starboard has made earlier demands, such as insisting that Yahoo set up a committee to explore strategic options and announcing cost cuts. Starboard owned about 0.75% of Yahoo as of September 30, 2016, which makes it the 23rd largest shareholder of the company. (Source: “Starboard Value’s CEO contacted by potential buyers of Yahoo core biz,” CNBC, January 6, 2016.)
The Bottom Line on YHOO Stock
At the very least, YHOO stock shareholders may rejoice in the fact that it looks like the company is going ahead with a sale. It just might take a little bit longer than expected, so investors will need to be patient with Yahoo’s potential sale.