Buying eBay is the best possible option for Yahoo for now, instead of selling its core business.
Valuentum, the renowned investment research firm that was initially led by Brian Nelson, Morningstar director, claims the right way to bring Yahoo Inc. out of its turmoil is not a spin off or selling out a core business segment, but instead acquire eBay.
An open letter was posted to the Chief Executive Officer of Yahoo, Ms. Marissa Mayer, in which Nelson came up with a four-step plan that will enable the company to monetize with the help of Alibaba shares and use that money to buy eBay eventually. This move will help it to gain momentum and double its intrinsic value by the fiscal year of 2025.
The plan is as follows:
For every share of Alibaba owned by Yahoo, it needs to come up with Class B shares. Then place around 20% of the recently issued Class B shares at a value of $60 each where the remaining 80% is held in Treasury, which can be issued in the future as per need. This will result in proceeds worth $4.6 billion approximately that can be used to generate finances from which a company can be purchased. However, the business needs to have assets that are undervalued but generating substantial cash reserves similar to eBay.
After this, it will be required to push the growth of eBay through high traffic platforms such as Flickr and Tumblr, which will lead to the creation of an e-commerce behemoth that can benefit the company’s core offerings.
Nelson mentioned in the letter, “We believe they will augment Yahoo’s intrinsic value, position it favorably from a competitive standpoint, enhance its existing properties, while facilitating a growth engine for innovation.”
When Mr. Nelson was approached on call, the executive laid emphasis on the fact that the letter was designed for generating ideas. Valuentum is an independent research organization, which has no stakes in the company and does not have any plans to buy Yahoo stocks.
However, his stance is neutral and unbiased which makes the opinion very concrete. “We just wanted to offer up an alternative idea. This is something we’re not sure many people thought about,” he told Business Insider.
Whatever Nelson has claimed might just have a solid point. Since the organization went through a spinoff of PayPal, eBay has been performing at a very low rate, he claimed. This is hard for a business that has a consistent free cash flow generation of $2 billion. It gets almost millions of visitors each month, which can push eBay’s traffic also.
There are several factors that need to be worked out, such as tax related issues, in order to make the deal a reality; but according to Nelson, this is the most viable option for Yahoo as of now.
“There is a very large potential for value creation on a long term basis,” he stated.