Becoming partners: Yahoo-AOL tie-up suggested

Merger could potentially lead to ‘$1 billion of synergies’.

NEW YORK:

An activist investment firm has urged Yahoo to explore a tie-up with online rival AOL, as such a deal could help the struggling Internet pioneer “unlock” value for shareholders.

Starboard Value LP, which said it had acquired a “significant” ownership interest in the company, said in an open letter to Yahoo chief Marissa Mayer that bringing together the two early Internet giants could lead to “up to $1 billion of synergies”. It would also lift the value of Yahoo as it divests a large portion of its stake in Chinese online group Alibaba.

Silicon Valley-based Yahoo acknowledged it received the letter and said it intends to act in best interests of the company. “We have maintained, and will continue to maintain, an open dialogue with all of our shareholders,” Mayer said.

Starboard’s move comes amid intense scrutiny over Yahoo, which like AOL is pushing heavily in digital media for reorganization efforts.

Starboard said that the value of Yahoo’s core business measured by its share price is virtually nil, when excluding the valuation of its holdings in Alibaba and Yahoo Japan. Yahoo’s Alibaba stake is worth $34 billion and its holdings in Yahoo Japan valued at $7.8 billion.

With Yahoo’s $8.6 billion cash stockpile, its enterprise value should be worth roughly $50 billion, but its market capitalisation determined by its share price is just $39 billion, according to Starboard, leaving an $11 billion “valuation gap.”

The investment firm said the reason for the gap is that Yahoo has poorly managed both its asset sales and investments, by pursuing a strategy of buying up startups “at massive valuations with little to no regard for profitability and return on capital.”

The most prominent investment by Yahoo was its $1.1 billion deal for the blogging platform Tumblr, which aims at reaching a younger audience.

Starboard said Yahoo should end its “aggressive acquisition strategy” which has spent some $1.3 billion, cut costs and find ways to get value from its overseas holdings with minimal tax consequences. And it said a tie-up with AOL would be logical because the two firms have a lot of overlap in areas such as online media and advertising.

Yahoo shares rose 4.4 percent on the news to close at $40.66.

Published in The Express Tribune, September 28^th, 2014.

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