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Yahoo bidders can’t even agree on what they’re buying

The prices coming in are all over the map.

Will AOL honcho Tim Armstrong be the next Yahoo leader?
Asa Mathat | Vox Media
Will AOL honcho Tim Armstrong be the next Yahoo leader?

If you were even the best person at math, you'd probably find yourself confused by the spate of varying media accounts about the second round of bids in the never-ending sale of Yahoo.

(So never-ending, it seems, it makes you wonder if anyone is working on reviving the actual core business of Yahoo, which has been hurtling off a cliff now for a very long time.)

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But being for sale is what Yahoo does for a living now, with the latest reports saying that the new bids range from $3 billion to over $5 billion. That's a big delta, of course, so let me break it down for you.

To begin, think about this a little like there is a house called Yahoo that a few people are looking to buy. Once a beauty, it's become run-down and in a neighborhood that is no longer that nice, but it's not a complete teardown either. Over time, each potential bidder gets a closer and closer look at the property and forms their own thoughts about what it's worth. With a little paint and some renovation, some think its value could rise; others are worried about termites. Lots and lots of termites.

In fact, a house auction is what one buyer compared it to. "This is a pretty basic deal with everyone trying to figure out the risk and reward here of taking over a clearly failing business," said the bidder. "Everyone has different criteria for what matters."

So what does matter?

First, there is the mystery of what assets are part of the bids. In essence, there are three big parts of Yahoo to deal with:

  • Its core business that includes search, advertising and media assets, all of which are in decline and getting worse.
  • Its patent portfolio that the company thinks is worth as much as $3 billion, but others peg at $1 billion.
  • Its real estate, which the company is pegging at about $1 billion, while others put it at a much lower value.

Yahoo also has big stakes in Yahoo Japan and Alibaba Group in China, but neither is part of the current sale; instead, they will become part of a separate entity. In addition, Yahoo Japan comes with a big annual payment that helps Yahoo's bottom line a lot, but part of those fees are going away soon. The remaining fees are being challenged and could also end.

Some companies, like Verizon, have decided they do not want to haggle with Yahoo about the patents and real estate value, nor do they want the burden of selling those things at prices that might or might not be overvalued. Thus, Verizon's bid is an all-cash one between $3 billion and $3.5 billion, depending on how employee compensation commitments are treated.

Others, such as several private equity firms, are taking more of a flyer and including those extra non-operating parts in their bids, thus making it seem as though their offers are larger, or upward of $5 billion. They have decided — a riskier proposition — that they can get a good price for the patents and real estate; they think taking that risk makes their bids more attractive to the Yahoo board. Maybe so!

Also at play and a big consideration is what happens to its current management team, a decision that depends on who buys the company. If Verizon grabs the reins, it has AOL head Tim Armstrong and lots of other experienced execs to take over for Yahoo CEO Marissa Mayer and her team of wounded warriors. That said, sources close to Verizon are not ruling out keeping on Mayer and others now in place.

The Quicken Loans team, led by Dan Gilbert and backed financially by Warren Buffett, also has a strong bench of execs perfectly capable of taking over key spots at Yahoo, although it will not comment on how it would staff the company if it won the bidding.

That said, most expect Mayer to depart once a deal is struck, especially since the sale is a clear indictment of her tenure and turnaround plans. And even if a sale does not happen — some think that's a possibility if the prices remain low — Mayer is not likely to stay anyway. Former activist shareholder Jeff Smith of Starboard Value was one of her chief critics before he pressured the company into handing over several board seats to him and his allies. With Smith in a strong position to dictate the future of Yahoo, it is unlikely that landscape includes current management.

What matters to the Yahoo board, said several sources close to the situation, is to pick a bid that is perceived as more than a fire sale and that protects them from shareholder ire. That's why the company and its platoons of bankers have also been trying to pair up private equity players with strategic partners, said sources, in order to create more of a competitive process.

That's because all the current bids are much lower than the prices that had been bandied about earlier in the process, when it was thought the floor of Yahoo was about $6 billion.

But ginning up excitement to get the price higher is hard here, said bidders, many of whom express worry about winning Yahoo as much as losing it. (Speaking of excitement, even I am now weary of this process so much so that it took me all day to type this report out.)

Others feel my pain.

"This deal is not one in which everyone's really enthusiastic, since there is a giant question of how quickly the business is deteriorating," said one bidder. "If you win, you might lose and vice versa."

We'll have to wait and see, since Yahoo's lugubrious board will take more weeks to consider the new offers and presumably try to horse trade with the bidders some more to get to a resolution and a final sale.

Here's one thing for sure: Whether Yahoo ends with a bang or a whimper, end it will.

CNBC's parent NBCUniversal is an investor in Recode's parent Vox, and the companies have a content-sharing arrangement.