crunch time coming for Yahoo CEO ?
Microsoft is rumored to be interested in contributing funds to a purchase of Yahoo.
Microsoft might go beyond this to a full fledged acquisition of Yahoo.
Microsoft stands to gain greater search share as well as a valuable web portal.
Kara Switsher of re/code reported yesterday that Microsoft (NASDAQ:MSFT) might back or contribute substantially to a buyout of Yahoo (NASDAQ:YHOO). Microsoft's involvement with a buyout makes perfect sense. The subsequent restructuring and ouster of Marissa Mayer would pave the way for a restoration of the exclusive use of Microsoft's Bing search engine in Yahoo's search. Increasing search share for Bing in its battle with Alphabet's Google (NASDAQ:GOOG) (NASDAQ:GOOGL) could well be worth the billions Microsoft might pay.
Welcome to Yahoo Sales Brochure
A Tough Negotiator
Prior to Mayer joining Yahoo as the CEO in 2012, Yahoo had reached an agreement with Microsoft in 2009 to use Bing. Bing would be used exclusively for "algorithmic and paid search services" accessed on its and partner web sites by personal computers. The agreement would last for 10 years. Effectively, Yahoo had retired from the search business.
Mayer was apparently not a big fan of Yahoo's decision on search. Certainly it seemed to many at the time of the Microsoft agreement that Yahoo was hollowing itself out. Swisher observed in 2014 that Mayer "was making a big push to return the company to the search business." In attempting to return the company to the search business, Yahoo would now be competing with two much stronger companies, Microsoft and Google.
Yahoo also would be competing with its erstwhile search partner. To avoid a direct violation of its contract with Microsoft, Yahoo would pursue search in key areas where Microsoft was not promised exclusivity: mobile search (through apps) and "contextual search."
Contextual search, which Mayer averred to be very excited by, is based on observations of actions that smartphones can make of the user, including search history, internet site visitation history, app usage, especially for social media, and physical location. It amounts to massive spying on the user, which recent privacy concerns have cast in a less flattering light. Nevertheless, it continues to be regarded as an "opportunity" by marketing and advertising concerns.
The growth of mobile and its ability to provide an abundance of contextual user information seemed to offer a way around the agreement with Microsoft. But there was a more direct route that Mayer pursued, which was to renegotiate the agreement with Microsoft. The renegotiated agreement was disclosed in April 2015 in an SEC filing.
Mayer must be a very tough negotiator. The agreement was revised so that Microsoft no longer had exclusive rights to personal computer search for Yahoo and partner sites. Microsoft's share was reduced to 51%. Microsoft would receive no revenue for searches that didn't use Bing, except for a small server maintenance fee. In addition, Yahoo's share of search revenue for Bing searches rose from 88% to 93%.
The Strategy Backfires
Yahoo's recent earnings report for 2015 Q4 and the full year reveals how badly the strategy to circumvent Microsoft backfired. While revenue for the year rose modestly y/y by 7.5% to $4.968 billion, traffic acquisition costs ballooned from $217.5 million in 2015 to $877.5 million 2015.
Yahoo posted an operating loss for the year of $4.748 billion, mostly due to a goodwill impairment charge of $4.460 billion. Even without the impairment charge, Yahoo would have posted a $288 million operating loss mostly due to the higher traffic acquisition costs.
As of the end of the year, Yahoo's board announced that it was looking for buyers of its core (non-Alibaba (NYSE:BABA)) assets. Yahoo's current market cap of $33 billion is just slightly greater than its end of 2015 valuation of Alibaba of $31.2 billion. This valuation is probably too pessimistic, and institutional investors, sensing a bargain, now hold 78% of the company.
Yahoo's year-end financial reports demonstrates very clearly that Yahoo is worth more than the market allows. In 2014, before the new agreement with Microsoft took effect, Yahoo posted an operating profit of $142.9 million. The path to restoring profitability is fairly straightforward. Dump Mayer. Dump the attempts to develop an independent search capability. Return to using Microsoft Bing. Integrate future mobile and contextual search efforts within the larger Microsoft cloud services strategy.
Investor Takeaway
Rarely in the acquisition of troubled companies such as Yahoo is an opportunity presented such as what currently faces Microsoft. Microsoft can be the salvation of Yahoo. Indeed, it's the only company that can. Any other acquirer just gets an empty shell when it comes to search. Microsoft would get an empty shell as well, but it's a shell it can profitably fill.
Regardless of whether Microsoft acquires Yahoo outright, or merely participates in a syndicate that acquires Yahoo, it can be assured that the role of Microsoft in Yahoo search will be restored, and with it a reasonable expectation of profitability going forward. Microsoft would acquire a still valuable brand and important web destination.
Synergy is an over used word, but there are certainly opportunities for synergies beyond search. Yahoo can provide an outlet as well as serve as a customer for Microsoft's cloud services. Microsoft acquires in Yahoo a web media outlet that can provide an ample advertising platform for Microsoft products and services.
I consider Microsoft's participation in a Yahoo buyout highly likely. Probably that buyout will come at a premium above the current share price, making Yahoo a buy. I continue to rate Microsoft a hold.
Further Reading
Yahoo Marissa Meyers CEO many heads are better than One
easyProperty a 20 20 vision Yahoo Google Bing , Zoopla, Rightmove, Facebook ,twitter
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coca cola tango free fall on Osbornes sugar tax & How Jamie Oliver made the big boys listen
New UK Property App Development Service For Estate Agents launched by iDevelopers
PurpleBricks change marketing strategy
shock horror Hang on ,,,Why Land Registry Privitisation, is a good thing & long over due
easyProperty a 20 20 vision Yahoo Google Bing , Zoopla, Rightmove, Facebook ,twitter
Canada’s House Price Dilemma >Monetary Policy and Financial Stability
Zac GoldSmith > Launches Housing Manifesto > off plan mortgages high street lenders, government & 6 London Local Authority pension funds
Purplebricks - And the teams just keep on growing! - online hybrid estate agent @onthemarketblog
Housing Minister Brandon Lewis' speech outlines the government's housing aims including its intention to deliver 1 million homes by 2021
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UK house prices increased by 7.9% in the year to January 2016, up from 6.7% in the year to December 2015.
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Running Costs - Zoopla tool, Phil Spencer explains, Dan the Detective Zoopla new TV advert
Shelter launch Great Home Debate ,Ellie Goulding shows her support on twitter social media UK
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propertyeye.net a new property , residential homes website, for sales and lettings ? Iain Duncan
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UK interest rates remain balanced , though sterling hit by EU vote says BoE
No Brexit for me, why I'm staying in a reformed EU and so should you
Rio Ferdinand and housing minister Brandon Lewis launched a new scheme to build thousands of affordable homes across UK
David and Samantha , morning after: how Brexit divorce gets messyPropTech ,WILL change ,the global economy“beyond recognition” Rics at MIPIMconference
Starter Homes: Unlocking the Land Fund Brandon Lewis MP
Video Bank of England Mark Carney Governor quizzed on the risks of Brexit ,Sir Jon Cunliffe
Cyber Criminals Phishing Scam Email, targets rightmove property portal, inc other property sites
Locally-Led Garden Cities , Villages Towns in the United Kingdom
coca cola tango free fall on Osbornes sugar tax
Good News for Airbnb Londoners - online MicroEntreprenuers
AirBnb / online, Ebay Amazon Start Up, micro-entrepreneurs rent property income, internet ,homes
#Budget2016 George Osborne ,Stamp Duty Surcharge ,Tax, Capital Gains Tax,Housebuilding
UrPad Online new Hybrid online estate agent for Wales ,rolled out by Property Industry Experts,Caerphilly
Facebook Founder Zuckerberg settles dispute with no pay out to property developer Voskerician
new affordable housing hits record low in london data shows
Days of Chaps payment numbered ,Central banks rival Bitcoin new RSCoin super currency
what the VLOG ? London property developers, Hackney Dalston E8 Vibe illusion
technology law - eddies from property portals boliga.dk and now zoopla.co.uk
Online estate agents, expecting sales bonaza, as sellers shun costly high street rivals
A Welsh developer of student accommodation ,plans March 2016 IPO + Wales tallest building
Help to Buy: mortgage guarantee scheme, Quarterly Statistics, March 2016
number of high street estate agents going bust up 16% , online estate agents market share up dictated by consumer not industry
NHBC NEW HOME STATISTICS ANNUAL REVIEW 2015,English Housing, Papworth Disability Trust ,Joseph Rowntree & Bungalows !
why Frank Whittle and the Saville row tailor have more in common with Warren Buffet
FT first 'Rightmove maintains grip in battle of property portals @onthemarketblog
Brick-And-Mortar Crumbling? Don't Believe It > Forbes > Leadership
Foxtons high street estate agent facing landmark claim for £2million from group of 55 landlords
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'Kleptocracy tours' 35,000 London properties currently have unknown offshore owners.
Pop-up housing could cut cost of London’s rental market & help UK housing Crisis
Chinese hunt for property bargains in Manchester amongst others say Pinnacle Alliance Property Developer
Property pain Investigation ,service charges increasing rapidly with 30 % of firms increasing fees
UK's largest property developers accused of 'profiting' on the back of the housing crisis
Private rental prices grew by 2.7% in England
Rental prices increased in all the English regions over the year to January 2016, with rental prices increasing the most in London (3.9%).
Property pain Investigation ,service charges increasing rapidly with 30 % of firms increasing fees
Foxtons report 4% revenue increase to City, despite Prime Central London property experiencing a dead-cat bounce
Property Partner successfully completes £15.9M ($22.4M) funding round
Nested - Start Up , property online disruptor to quick sale homes ?
Building a new deal for London: Final report of the London Housing Commission
high street estate agency valuations – flattery will get you nowhere by @emoovceo
Start me up: Why London needs open workspaces for creativity, innovation and growth
Live inquiry application launch 14 th March say Land Registry Marketing Manager
LA police testing knife found on OJ Simpson property - reports
'Kleptocracy tours' 35,000 London properties currently have unknown offshore owners
UK's largest property developers accused of 'profiting' on the back of the housing crisis
Pop Up Housing a solution not just for London but the UK
estate regeneration statement GOV UK DCLG ,Lord Heseltine ,Brandon Lewis MP
Digital Mortgage service: making improvements again & again
Buy-to-let investors 'could face losses'
Uber's property footprint unmatched among San Fran Bay Area ,Tech StartUps
Guests staying with AirBnB for the super bowl top 15,000
Nobroker.com Homes, one step closer to making estate agent obsolete , new round of funding
OnTheMarket overseas properties , Britons with holiday homes in France face paying extra 10% in tax if they sell the property following a Brexit
Guests staying with AirBnB for the super bowl top 15,000
FT first 'Rightmove maintains grip in battle of property portals @onthemarketblog
Morrisons Super Markets signs deal to sell food to Amazon online customers
Amazon eyes up UK restaurant delivery market
Booking.com Launches of Passion Search ,Don’t battle your passions, unleash them
David Cameron calls EU referendum for June 23 2016 Official Statement @onthemarketblog
zoopla.co.uk selects Birst's Cloud BI platform for data integration from all its brands and apps
Good News UK mortgage approvals hit two-year high BoE
IMF Statement: LUXEMBOURG: Concluding Statement of the 2016 Article IV Consultation Mission
Spanish house prices 2015 see rise highest rise 2007 crash , stabilisation of housing market, idealista.com
No Brexit for me, why I'm staying in a reformed EU and so should you
Scotlands House prices rise and sales grow ros.gov.uk
An analysis of recent trends in the Irish rental market 2015 in Review
fourth quarter 2015: First-time buyers took out 87,100 loans to purchase homes. + house prices in UK
GeoPhy Exodus-from-EU-may-spark-correction-in-the-rental-market.html
1st of March David Cameron St David's Day message "wonderful country and a great part of the United Kingdom"
Amazon eyes up UK restaurant delivery market
Bank of England's unease over market's rate view Carney & Shafik
Morrisons Super Markets signs deal to sell food to Amazon online customers
Brick-And-Mortar Crumbling? Don't Believe It > Forbes > Leadership
Chinese authorities shut down microblogging accounts belonging to a real estate mogul
Foxtons high street estate agent facing landmark claim for £2million from group of 55 landlords
Brexit ,purplebricks.com investor, impacts on the property market overall and on aggregate consumption in the economy will be limited
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