Yahoo! and Aol – Heaven and Hell

A deal with Aol would be great for the stock but bad for the company.

• The Aol and Yahoo! story is heating up again (see here) as Starboard has gone back into Aol and now has a reasonable stake in both companies.
• There is substantial value to be released in both companies and while putting them together would give a one-time release of value, it would do nothing for the long term outlook for either company.
• The main issues here are that Yahoo! is trading at a substantial discount to the sum of its assets and that its core business continues to underperform.
• The activists want Yahoo! to realise the value in its Asian assets, cut costs and return cash to shareholders thereby releasing substantial value for shareholders.
• Such a release of value would most likely result in a one-time substantial rally in the stock but little else.
• They are also pushing Aol and Yahoo! to get together in the belief that they can solve each other’s problems.
• Unfortunately this approach ignores the fact that Yahoo!’s only real chance of seeing real growth again lies in the development of its ecosystem.
• Over the last 2 years it has accumulated a series of Digital Life assets that together give it over 70% coverage of the Digital Life Pie.
• While it has been great at accumulating these assets it has done almost nothing with them.
• These assets need to be integrated and rolled out on mobile in a fun and easy to use way where users can identify with Yahoo!
• That way users would want to spend time with Yahoo! which Yahoo! can then use to sell valuable, targeted advertising.
• Unfortunately, none of this has happened which is the main reason why the core business has been a bad underperformer this year.
• Getting together with Aol does nothing to fix this problem and in every likelihood would make it worse.
• This is due to the added complexity of adding in Aol’s assets on top of the jumble that is already there at Yahoo!.
• Furthermore, other than the potential to release value for shareholders, this combination does nothing for Yahoo!’s ecosystem strategy and nothing to get growth going again.
• This is why I suspect that the management of Yahoo! will resist this deal but the sale of its Asian assets would go a long way to mollifying investors.
• I continue to be frustrated by Yahoo!’s lack of progress and think that until there an improvement in the company’s ability to execute, its core business will continue to underperform.
• I am taking Alibaba-related profits on Yahoo! as there is no sign of a turnaround and I do not expect it to sell its Asian assets.
• I could be looking for a re-entry point in 2015E but I need to see some signs of progress first.