If a deal between Yahoo Inc. (NASDAQ:YHOO) and Alibaba Group Holding Ltd. happens, the timing couldn’t be worse for all involved.
Last year, Jack Ma, the Chinese billionaire who controls Alibaba Group, made headlines when he said that he was “very interested” in buying Yahoo. At the time, the Internet portal was reviewing its “strategic options” following the ouster of CEO Carol Bartz.
Nothing seems to have come of this overture, and Yahoo’s board decided — again — to go it alone, hiring Scott Thompson, the former head of eBay Inc.’s (NASDAQ:EBAY) PayPal unit, as CEO.
It’s too bad Yahoo didn’t take Ma up on his offer since both companies are now in weaker bargaining positions.
Shares of Yahoo have tumbled nearly 18% over the past 52 weeks.
And Alibaba Group, which is private, probably should have taken its publicly traded Alibaba.com private a year ago since China’s economy is slowing. In the first quarter, China’s economy grew by 8.1%, the fifth straight quarter of slower growth. Alibaba.com shares have declined 2.64% over the past year.
Yahoo’s 40% stake, which it acquired in 2005, is worth about $14 billion, which is roughly the size of its current market capitalization. The Wall Street Journal is reporting that the Sunnyvale (Calif.) company is in talks “to sell a portion of its stake” back to Alibaba. How much isn’t clear, but it seems unlikely that Yahoo would unload the whole thing given the huge tax bill such a sale would trigger. The possible monetization of Yahoo’s Alibaba investment has been rumored for years, but nothing has ever come of it, and there’s no reason to believe the latest media scuttlebutt will lead to a different result.
Setting aside the questions of hindsight, the questions Yahoo investors need to ask is what will happen if the company’s board, which hasn’t impressed anyone in years, manages to pull off an Alibaba deal. A windfall of a couple of billion dollars would be nice, but investors aren’t going to let Yahoo, which has about $1.7 billion in cash on its books, build a cash reserve akin to Apple‘s (NASDAQ:AAPL). Yahoo would have to do something with it.
The portal could pay a special dividend, though it wouldn’t make up for the years of mismanagement that has destroyed tens of billions in shareholder value. A sale of 20% of Yahoo’s Alibaba stake ($2.8 billion) could easily net enough cash for Yahoo to buy New York Times Co. (NYSE:NYT), which has a $939 million market cap, if the Sulzberger family could be persuaded to sell.
The Graham family, which controls Washington Post Co. (NYSE:WPO), might be tempted to sell its newspaper business, which in the last quarter saw its operating loss nearly double, to $22.6 million, as print advertising at its flagship newspaper fell 17%.
Although AOL Inc. (NYSE:AOL) CEO Tim Armstrong denied a report that he wants to sell the tech blogs TechCrunch and Engadget, which have been a huge headache for management, perhaps he could be persuaded to sell them or other sites if the price were right.
In short, the possibilities that the Alibaba cash could provide are endless. All it takes is imagination. That, unfortunately, is a quality Yahoo management has lacked for nearly a decade.
Jonathan Berr does not own shares of any of the aforementioned companies.
