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Now What? Investors See Yahoo Buyback, Alibaba Sale & Possible Takeover

Following the resignation of Yahoo Chief Executive Scott Thompson under the ‘Resume-gate’ pressure applied by Dan Loeb, investors see a share buyback in short order and then a more difficult value-creation process ending in the sale of its Asian assets & an eventual merger, possibly by former suitor Microsoft.

Scott Thompson, CEO of Yahoo
Source: Wikipedia
Scott Thompson, CEO of Yahoo

Thompson stepped down after just four months at the helm of the fourth most-trafficked web site after Third Point’s Loeb’s discovered the former eBay executive had a Computer Science degree on his official resume that he apparently never received. The activist hedge fund manager and two of his nominees will now be placed on the board and Ross Levinsohn, global head of media, will take over as CEO.

“Employees lost complete confidence in Scott,” said Eric Jackson of Ironfire Capital after the announcement. “Now, with Ross in place and Loeb and his nominees on the board, there's finally a great opportunity for several positive catalysts in the coming months for the stock.”

Yahoo has $2.65 billion in cash, zero debt and yet it only repurchased $17 million worth of stock in the first quarter. Loeb is likely to urge the company to use that cash and lever up its balance sheet to repurchase more stock. He indicated this much in his first letter to Yahoo in September of last year.

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“Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company’s stock price,” wrote Loeb in September 2011. “In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo’s globally trusted franchise and platform for a range of new products and innovations.”

Next on the checklist is what to do with Chinese e-commerce company Alibaba , 40 percent owned by Yahoo. The company was reportedly close in its negotiations with founder Jack Ma to sell as much as 25 percent of its stake back to Alibaba for about $8 billion after footing some of the tax bill.

Yahoo also owns a third of Yahoo Japan, a joint venture with Softbank. Investors cautioned these sales could become more difficult if the other parties catch wind of any urgency on Yahoo’s part to dump the assets so it can move on.

And then down the road there is a full merger in the cards, investors predicted, with the most likely buyer to be former suitor Microsoft , albeit at a lower price.

“Mr. Ballmer is on line one for you," joked Patty Edwards of Trutina Financial, following the news of Thompson’s departure.

After rejecting a $31 a share offer by Microsoft’s CEO Steve Ballmer in 2008, Yahoo would later strike a search partnership with the world’s largest software maker.

“Yahoo is two years into their 10-year search deal where Bing is the search engine on all Yahoo properties and where Yahoo has essentially given their ad sales team to Bing,” noted Dan Nathan, who runs the popular web site RiskReversal.com. “Why buy the cow when you can get the milk essentially for free?"

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