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Yahoo sale could reboot online ad competition

20 April 2016 in Trading Ideas

Key Takeaways

  • A potential Yahoo sale has lifted the curtain on the many companies that would like to bolster their online ad business.
  • If their market share continues to grow, Google and Facebook could be worth a combined $1 trillion in less than 10 years.
  • Motifs mentioned: Onward Online Ads
  • Stocks mentioned: Yahoo! Inc (NASDAQ:YHOO), Verizon Communications Inc. (NYSE:VZ), Time Inc. (NYSE:TIME), Alphabet Inc (NASDAQ:GOOGL), Comcast Corporation (NASDAQ:CMCSA), AT&T Inc. (NYSE:T) IAC/InterActiveCorp (NASDAQ:IAC), Facebook Inc. (NASDAQ:FB).

For all the disdain tossed at former tech high-flyer Yahoo! Inc (NASDAQ:YHOO) in recent years, the company has had no trouble enticing possible acquirers for either all or part of its business.

Reports earlier this month suggested that as many as 40 companies had expressed initial interest in Yahoo, with Britain’s Daily Mail and General Trust plc floated last week as one potential suitor, as was Japan’s Softbank Group Corp, according to a Bloomberg report.

The Daily Mail would like to boost its US online presence with Yahoo’s heavily trafficked media and news sites. It would have to partner with a private-equity firm to complete the deal, Bloomberg said.

Meanwhile, SoftBank, which owns a 43 percent stake in Yahoo Japan and a majority stake in Sprint, might be interested in a deal since it is already looking to end its $240 million annual fee payment to Yahoo.1

However, a new odds-on favorite has just emerged: The Wall Street Journal reported that the inside track is now occupied by Verizon Communications Inc. (NYSE:VZ), which has won out as several potential suitors dropped by the wayside.

One of those drops is Time Inc. (NYSE:TIME), which concluded the degree of difficulty in turning around Yahoo is too great, according to the Journal.

Others that have opted not to make a bid include Google parent Alphabet Inc (NASDAQ:GOOGL), Comcast Corporation (NASDAQ:CMCSA), AT&T Inc. (NYSE:T) and IAC/InterActiveCorp (NASDAQ:IAC).2

Buying Yahoo would allow Verizon to continue ramping up its data collection, advertising and mobile content businesses, dovetailing with its acquisition of AOL last year, and assuming the Federal Communications Commission doesn’t stand in the way of the plan.

Verizon, with $4.5 billion in cash on hand, also has the outright means to purchase Yahoo’s web assets.3

Verizon hopes video services and online advertising will be its next growth engine. It plans to combine customer data from smartphones with advertising inventory on AOL—and possibly Yahoo—to create an online advertising technology platform that can compete with Facebook Inc. (NASDAQ:FB) and Google.

That sort of goes against the idea that Yahoo’s core business is worthless. Indeed, a Bloomberg analyst valued the franchise — consisting of advertising, search, and its popular content sites like Yahoo Finance and Yahoo Sports — at $5.34 billion, assuming a 1.5 multiple of revenue (the same revenue multiple that surfaced in Verizon’s purchase of AOL last year.4

In addition, the Journal speculated that Softbank might consider buying Yahoo’s 36 percent stake in Yahoo Japan just to keep it out of Verizon’s hands.

Yahoo’s stock is up more than 36 percent in the past two months as a deal for the company has become increasingly likely.

Shares of Yahoo have an 11.2 percent weighting in the Onward Online Ads motif, which is up 2.6 percent in the past month. In that same time frame, the S&P 500 has gained 2.5 percent.

Over the past 12 months, the motif is up 3.3 percent; the S&P 500 has risen 2.2 percent.

The appeal for any company wanting to become a major threat to Google and Facebook is a tall feat as a recent estimate in a Wall Street Journal article estimated that the combined value of those two companies could climb 14 percent from its current level to $947 billion, assuming they achieve a 30 percent global-advertising share by 2025, compared with the 15% they control today.5

Of course, that’s not a given, with an entirely other 15 percent of share to gain, thanks largely to the relative strength of US ad spending new growth most likely would need to come from outside this country.

And the prediction also assumes global advertising spending reaches 1 percent of global gross domestic product by 2025, which is roughly the share spent in the US. Based on data from the International Monetary Fund, that would mean $1.3 trillion in ad spending by 2025, the Journal reported.

Ad spending in emerging markets isn’t quite at that level yet, but an investor could imagine that growing a presence in the sector could be good for the stocks of online advertising companies.

  1. Rani Molla, “Yahoo Sure Has Lots of Attractive Suitors,” Bloomberg.com, April 12, 2016, http://www.bloomberg.com/gadfly/articles/2016-04-12/yahoo-sure-has-lots-of-likely-suitors-besides-verizon, (accessed April 18, 2016).
  2. Douglas MacMillan and Ryan Knutson, “Verizon Tops Pack of Suitors Chasing Yahoo,” wsj.com, April 17, 2016.
  3. ibid
  4. Rani Molla, “Yahoo Sure Has Lots of Attractive Suitors,” Bloomberg.com, April 12, 2016, http://www.bloomberg.com/gadfly/articles/2016-04-12/yahoo-sure-has-lots-of-likely-suitors-besides-verizon, (accessed April 18, 2016).
  5. Miriam Gottfried, “Facebook and Google: The $230 Billion Question,” wsj.com, April 12, 2016.
  1. William
    21 Apr at 5:34 am

    I need it