While it seems that Yahoo has been busy turning down buyout offers from Microsoft, it does have one card still left in its hand. In fact, Yahoo will look into a Asian tracking stock for its holdings in Yahoo Japan and Alibaba, the internet’s leading Chinese retailer. Though Yahoo has been suffering from slower business online in the US, both Yahoo Japan and Alibaba are positing great growth rates.
Why Yahoo won’t sell
These two companies might be much of the reason Yahoo decided to hold out on the buyout. Alibaba grew by 400% last year, while Yahoo’s growth went negative, as it lost marketshare to Google. Yahoo has consistently said to Microsoft that it was not fairly valuating its holdings in Asia and abroad. Future growth for Yahoo itself seems slow, but its holdings are doing very well.
Yahoo still retains a 39% stake in the parent of Alibaba and 33% of Yahoo Japan. The company hinted at the possibility of a spin off, which would raise cash for the money strapped Yahoo and help it expand its presence in the United States. A spinoff would also allow for Yahoo to sell off its most profitable units to Microsoft while holding strong to its US portfolio.
Shareholder pressure to sell out
Yahoo is under increasing pressure from shareholders to take Microsoft’s latest offer of $33 per share. Yahoo said it wanted $37 per share. Either price is a hefty premium from Yahoo’s pre-offer price of $19 per share. If Yahoo were to get its chosen valuation, it would value its holdings at nearly twice the value of the market. Yahoo faces many shareholder lawsuits if it continues to decline buyout offers; many investors feel that the CEO, Yang, is unwilling to sell because he founded the company. Microsoft has made many reasonable offers for the company, up to a 60% premium over the pre-offer trading price.
Huge growth overseas
In 2006, Alibaba posted sales gains of 59% and Yahoo Japan gains of 23%. Its fair to say that Yahoo’s stock price, which is largely affected by the progress of Yahoo.com, might be oversold or at least undervalued in its present deal with Microsoft. If Microsoft were to buy Yahoo, it would gain a leg up on Google by controlling Japanese and Chinese search, while purchasing a very important part to the US search engine business.
At this point, the best option for Yahoo and its shareholders is to consider an entirely Asian division. It is likely that this new tracking stock would receive a much higher valuation than it could ever receive while being grouped with Yahoo.com’s American holdings. The new tracking stock would allow for an easy spin off in the future, while letting Yahoo properly value its own assets. If Yahoo does create an Asian tracker, it promises to be a great investment.