Why Yahoo Could Be Worth More If It Split Up

Yahoo! Should Split Up, Says Alibaba's Jack Ma
Yahoo! Should Split Up, Says Alibaba's Jack Ma

Alibaba Group CEO Jack Ma (pictured) thinks Yahoo (YHOO) should be broken into pieces. "If running a big company isn't easy, divide it up into a few small companies," suggested the head of the large Chinese e-commerce company at the AllThingsD D9 conference. "They should be more open-minded about ways to solve their problems." What he doesn't say is why the breakup makes sense financially.

Yahoo owns 43% of Alibaba, which has been a sore point for Ma. Alibaba recently transferred ownership of its Alipay division to a separate company that Ma controls. The company said it made the move to comply with Chinese regulations. Yahoo! complains that the action has reduced Alibaba's value, and that it was not warned about the decision. The dispute between the two companies has been heated, and the conflict over the Alipay spin-off has not been resolved.

But could Ma be right about a Yahoo breakup? That depends to a large extent on what the three major assets of the company are worth. Those numbers have often been analyzed in the past, but perhaps incorrectly.

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Critics of Yahoo look at its $22 billion market cap and say that the firm's large stakes in Alibaba and Yahoo Japan may be worth at least 75% of that. The Alibaba stake has been valued for as much as $11 billion and its share of Yahoo Japan at $6 billion. But there's a serious flaw in those valuations: There may be no buyer for the assets at those prices. Alibaba hasn't made an offer to buy out Yahoo -- at least, not in public. That's strange, since it has often said it wants Yahoo out. Likewise, its Yahoo! Japan partner, Softbank, has been reticent about offering to buy Yahoo!'s piece of the company. Assets without buyers don't really have a value at all -- except on paper. Yahoo! also has about $3 billion in cash on its balance sheet.

Still, if the theoretical figures for those Japanese and Chinese assets are right, the balance of Yahoo is being valued at $3 billion by the markets when its cash is factored out. Yahoo!'s annual revenue run rate as of last quarter was $5.6 billion. Its net income on the same basis is $1.2 billion. Based on those numbers, it's hard to imagine that Yahoo!'s core operations are worth just $3 billion. At six times net -- a conservative figure -- Yahoo!'s operating division is actually worth over $7 billion.

Microsoft (MSFT) made an offer to buy Yahoo for $45 billion in early 2008. The bid was high because for Microsoft, the deal was "strategic." Ownership of Yahoo would have pushed Microsoft's share of the U.S. search market as high as 25%. It would also have given Microsoft search a foothold in Japan. The combination of MSN and Yahoo portal business would have made the new property the largest online business in the U.S. based on audience. There are very few people who believed that Yahoo! was worth $45 billion to anyone other than Microsoft. Microsoft and Yahoo eventually did combine search operations. But the offer was an indication that Yahoo!'s market value is too low.

The point that most undermines Yahoo market valuation is that the company is barely growing -- but it's still very profitable. Taken solely as the sum of its parts, it may be worth nearly $30 billion: They make not like the source, but the Yahoo board may want to take Ma's advice.

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