Reports that Yahoo may be weighing a sale of its core business assets sent the company’s stock up Wednesday, but they also caused for some confusion among industry watchers. Yahoo has been struggling for years. So why pursue a sale now all of a sudden?
The answer is twofold: the company is dealing with an immediate tax issue, but it’s also facing a long-term shift in the way advertising is sold.
One pressing matter before Yahoo’s board this week is whether to continue with the planned spin-off of Yahoo’s stake in Alibaba. At one point, Yahoo owned 40 percent of the Chinese internet company, thanks to an investment it made 10 years ago. Back then, Yahoo invested $1 billion in Alibaba, and also handed the company the keys to Yahoo China.
That original investment has already been a goldmine for Yahoo, which reduced its stake in Alibaba, selling off shares and bringing in billions in the process. In January, Yahoo’s board decided that it was going to sell of its remaining stake in Alibaba, valued around $30 billion.
This decision was initially backed by investors. But last month, activist investor Starboard Value reversed its stance on the Alibaba stake sale, and suggested the company should bid farewell to its internet business instead.
The reason: Starboard doesn’t want to pay taxes on those Alibaba shares. Yahoo has been planning to structure the divestiture in a way that could be tax-free, but the IRS hasn’t been playing ball, declining a request by the company to state that there won’t be a bill in the end, after all.
The difference between paying taxes and selling those Alibaba shares tax-free? A whopping $9 billion, which Starboard and others would like to keep. It’s also a magnitude more than Yahoo’s core business is worth, which is why selling the U.S. homepage and other assets and keeping the China investment may make sense on paper.
But there’s one other factor that’s at stake in all of this: The slow death of display advertising. Yahoo is primarily an advertising business, selling banner ads across its properties, including the still immensely popular Yahoo homepage, and increasingly monetizing video with advertising as well. For a long time, Yahoo could attract premium brand dollars for premium online real estate
However, the way advertising is being sold is shifting towards a programmatic approach, with algorithms, and not agencies deciding where ads are placed and dollars are spent. The slow death of traditional display advertising spells trouble for Yahoo, as Pivotal Research Group senior analyst Brian Wieser remarked in a note sent to investors yesterday.
“Yahoo is hit hard because it historically was able to generate high pricing for its inventory,” he noted, adding: “However, in a programmatic era, efficient audience aggregation is not unique to Yahoo.”
Wieser also noted that video ads are no magic bullet for Yahoo. “To some degree Yahoo can retain “share of wallet” by adding more video inventory to its mix of ad units (as video units typically command higher prices vs. display) but this opportunity may be limited as every other publisher adds more and more video inventory to their properties,” he wrote. Add to that the fact that Yahoo severely overestimated its ability to get TV-like ad dollars for shows like “Community,” and you can see why some investors may be more than ready for Yahoo to sell.
Of course, that still doesn’t mean that there will be a buyer, and a complete sale of all essential assets may not be the only option. The company may just decide to go forward with the sale of its Alibaba stake, eat any potential tax bill, and restructure next year. But other than death and taxes, there’s one more thing certain for Yahoo: The company’s board will have to make some big decisions. Maybe not this week, but definitely in the coming months.