Yahoo move sparks worry of M&A push
SAN FRANCISCO (MarketWatch) -- Shares of Yahoo Inc. slipped Friday, a day after the company said it may rethink a plan to return cash to shareholders, pushing the struggling Web portal to what an analyst called the "edge of the twilight zone."
Yahoo's (YHOO) stock fell 5.4% to close at $15.15, its biggest one-day drop since late October, as news that Chief Executive Marissa Mayer was reviewing the firm's strategy sparked worries that the company will use cash from a recent deal to sell a big chunk of its stake in Alibaba to buy a company or companies.
Bank of America analyst Justin Post downgraded Yahoo to neutral, saying in a note: "We think it is now more likely than not that Yahoo will make material acquisitions and we think investors may have doubts that acquisitions will create value."
The surprising move turned the spotlight on the tension between long-term investors hoping for a comeback for the one-time Internet pioneer and those hoping to cash in on Yahoo's most valuable assets, its Asian properties.
"We believe the lion's share of current Yahoo investors own the stock for its capital return on Asian asset sales and did not attribute much value to the core business," SunTrust analyst So Young Lee said in a note.
The Yahoo news, Lee added, "brings a great deal of uncertainty to how investors will see capital return from noncore assets including the remaining Alibaba stake and Yahoo Japan."
Investors had cheered a recent deal in which Yahoo agreed to sell back some of its stake to Alibaba as part of a plan that would monetize the company's substantial stake in the Chinese Internet giant.
Colin Gillis of BGC Partners speculated that Mayer, who just took over last month, may be trying to establish control in her first CEO post.
"Part of it is your classic, 'I'm taking over. All bets before me are off,'" he said in an interview late Thursday. "I can understand that, but what's going to be an overhang on the stock is the part of returning cash to shareholders."
That overhang led Bernstein analyst Carlos Kirjner to paint Yahoo, once the symbol of the Web revolution, as being "at the edge of twilight zone."
Lee of SunTrust argued that "to be an investor in Yahoo today, one would have to believe Ms. Mayer can revitalize its core business, something that the company has tried and failed in past attempts."
Yahoo's core business has been under attack with the rise of stronger Internet players, led by
What's made that surprising is that Yahoo just went through a major board and management shake-up following the successful proxy campaign of Third Point CEO Dan Loeb, who is now a member of the board.
Loeb and his allies on the board were widely expected to push for the monetization of the Asian assets to benefit Yahoo's shareholders.
"Either the board has changed its mind on its previous capital allocation decision or management believes the board could change its mind," Kirjner said in a note. "Neither is good news for shareholders in our view, but, obviously, the second alternative is not as bad as the first. Maybe management is wrong."
He argued that "it would be as mistake for Yahoo to pursue 'large M&A,' that is, to acquire one or a few companies likely to fetch multibillion-dollar valuations, such as Pinterest or Four Square, or many midsize companies."
Yahoo is widely seen as behind major Internet trends, particularly in mobile and cloud computing and social media. But Kirjner said it would be wise for Yahoo to "walk before it runs."
Gillis of BGC Partners underscored the new uncertainty surrounding Yahoo. "What would Yahoo buy? Twitter? Google? You can't buy Google," he said. "What would you do with that cash? That's what gives us chills."