As U-turns go, Jerry Yang’s resignation last week as CEO of Yahoo must rank with the biggest. He founded the internet search and media giant back in 1994, stepped down after the dotcom bust, and took back the top job in June 2007. But after failing to reinvigorate the business’s prospects and spurning a mouth-watering $33 a share bid from Microsoft in May, he has admitted defeat and stepped aside.
Yahoo (Nasdaq:YHOO)
So where does Yahoo go from here? In a nutshell, it’s break-up time. Yang’s strategy of keeping Yahoo independent failed. Attempts to secure a joint online search deal with Google were abandoned over regulatory concerns, while talks over a possible AOL merger have also stalled. Worse still, the ailing economy is discouraging advertisers from spending on its sites, particularly the billboard-style displays that are Yahoo’s bread and butter. With a weakened board and the share price at five-year lows, Yahoo could be the target of a predatory bid. So how much is it worth?
First, the firm has a huge $3.3bn cash pile, equal to more than $2 a share. Its internet search business, with around 18% of the market, should realise another $5 a share on disposal – possibly more if Microsoft returns to the table. Meanwhile, Yahoo.com ranks as the world’s favourite website; the group also owns stakes in Alibaba and Yahoo Japan, which together should add another $10 a share. By my reckoning, Yahoo is worth $17 a share on a standalone basis, even without a takeover.
Economic conditions are tough. But this is still a growth industry. The US internet ad industry grew by 11% in the third quarter and was up 2% on the second; globally the sector (already worth $52bn a year) is forecast to grow by more than 10% over the next two years. Yahoo also faces a strengthening dollar and challenges from online rivals such as Facebook and Youtube.
But Yahoo owns some of the most desirable real estate on the internet, enjoys a 10% share of the global online ad market and has around 500 million registered users. With Yang’s departure confirmed, a break-up deal looks odds-on, particularly if activist shareholder Carl Icahn gets his way.
Recommendation: BUY at $10.09
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.