Is another merger around the corner? It seems like 2014 has been the merger and acquisition year. We have witnessed a series of mergers and acquisitions across almost all sectors of business. From hardcore manufacturing, to IT bigwigs, everyone seems in a rush to acquire businesses and increase their periphery of work.
The trails of acquisitions and mergers started back in January, and it seems to continue incessantly, taking in companies like Google (GOOG, Financial), Amazon (AMZN, Financial), and SAP (SAP, Financial) in its ambit to name a few. It now seems that in a few months from now, another IT honcho will also join the merger and acquisition club. Let us try to work out the equation of the probable merger.
A new Yahoo!
Activist investor Starboard Value LP said on Friday it had acquired a significant stake in Yahoo! Inc. (YHOO, Financial), which means another fund pool attached to the Yahoo! gamut of investors. Recently, Yahoo!’s revenue growth has lagged behind those of competitors such as Google, Facebook (FB, Financial), and Twitter (TWTR, Financial). Starboard Value, after having a slice of the Yahoo! pie, has urged the internet company to explore a merger with AOL Inc. (AOL, Financial).
Starboard, the second activist investor to have stepped into the Yahoo! family in the last three years, also said the company should quickly monetize its Asian assets, which exceed the enterprise value of its actual business.
Soon after this revelation from the Starboard deck, Yahoo!'s shares rose 4.4% to close at $40.60, while AOL jumped 3.7% to $44.55, both on NASDAQ and NYSE.
Starboard's call marks the latest chapter in Yahoo!'s protracted effort to revamp the Internet pioneer whose revenue growth has been seeing the downside for quite some time. In a letter to Yahoo! CEO Marissa Mayer, Starboard said it was looking forward to engaging directly into Yahoo! operations to discuss how its plan could be implemented in a timely manner and bring benefits to the internet giant. Mayer confirmed the receipt of the letter from Starboard and said that it will be reviewed on Friday. The company said it would provide an update on its capital allocation initiatives during its third-quarter earnings call.
Street talks and workouts
Starboard, a former activist investor in AOL, also said a Yahoo!-AOL merger could create up to $1 billion in synergies by reducing double expenses incurred in online display advertising and other overhead costs. Instead of incurring these expenses as two separate entities, they can join hands and reduce the cost by advertising together as a single unit, also causing the individual clientele to amalgamate and form a wider spectrum of clients.
Ironfire Capital founder Eric Jackson said, "I don't think it will happen, but I do think Yahoo! is now in play. It puts more pressure on Mayer."
"Between now and four months from now, someone will want to submit a short board slate and they will have a strong case," said Jackson, who owns a stake in Yahoo!. "Mayer is really under the gun to create value for shareholders and prove she is doing a better job than anyone else can do."
Mayer, a former Google executive, was hired in mid-2012 to lead Yahoo! with the recommendation of Dan Loeb, the head of activist hedge fund Third Point LLC, who had waged a bitter proxy war with Yahoo!, and eventually triumphed over several board seats at Yahoo!.
Starboard is not the first company to suggest a marriage between Yahoo! and AOL, in fact, this postulation has surfaced once every quarter over the past few years since the 1990s. Internet powerhouses are trying to regain their foothold in the internet market and have been struggling to keep pace with the competitors. Both AOL and Yahoo! have seen their online ad market share shrink considerably in recent years. AOL's $3.5 billion market valuation makes the merger viable for Yahoo!, which has $9 billion in cash, said BGC Partners (BGCP, Financial) analyst Colin Gillis.
AOL’s office has not commented on the matter. About two years ago, Starboard bought a stake in AOL, pursued for a patent sale and tried unsuccessfully to occupy board seats. It no longer holds any shares in AOL. Starboard is also engaged in a high visibility proxy battle with Olive Garden owner Darden Restaurants Inc. (DRI, Financial). Though Starboard did not specify the size of its holdings in Yahoo!, investors who own 5% or more are required to publicly disclose their holdings.
Facts and figures of Yahoo!
Shares of Yahoo! have seen an upswing by more than 150% since Mayer took the top seat in 2012, but most of the gains came from the fast-rising value of Yahoo!'s stakes in Chinese e-commerce giant, Alibaba Group Holding Ltd (BABA, Financial), which created a huge storm recently with its IPO launch in the U.S., and a joint venture with Japan's Softbank Corp.(SFTBF, Financial)
Yahoo! sold 140 million Alibaba shares in the Chinese company's blockbuster IPO earlier this month, adding billions of dollars to Yahoo!'s balance sheet. While Yahoo! said that it plans to return at least half to its shareholders, investors and analysts are worried that Mayer might spend the rest of the cash on poorly chosen acquisitions, which would eventually prove futile in Yahoo!’s tryst to gain back its market share.
Starboard accused Yahoo! for not doing enough to reduce tax liability associated with selling Alibaba’s shares.
Analyst take
It’s yet to be seen whether the anticipated merger between AOL and Yahoo! takes place and how the changes will be incorporated.
Analysts are speculating on the future of the merger, but as stated, it would be too early to share the speculations publicly. Let’s stay tuned and keep watching any further moves.
