Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Should Investors Follow Dan Loeb Out of Yahoo! Inc. (YHOO)?

Page 1 of 2

Monday wasn’t a good day for Yahoo! Inc. (NASDAQ:YHOO) shareholders. The company announced that three of its directors were resigning, and that Dan Loeb’s Third Point was selling most of its stake.

Loeb’s work with Yahoo! Inc. (NASDAQ:YHOO) was certainly impressive, and having made his money, he’s probably moving on to new fights (a bigger Sony Corporation (ADR) (NYSE:SNE) stake?). But with Third Point out of the picture, the Yahoo! story may have just fundamentally changed.

Yahoo!’s Alibaba-fueled rally

THIRD POINTSince Sept. 2011 (when Third Point began accumulating a stake) shares are up well over 115%. Yahoo! Inc. (NASDAQ:YHOO)’s new CEO, Marissa Mayer, may get a lot of credit for the turnaround, but for the most part, the Yahoo! story has been all about something it did in 2005. Back then, the company invested in Alibaba, a Chinese Internet retailer that now does more business than Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) combined.

Last September, Yahoo! Inc. (NASDAQ:YHOO) sold about half of its Alibaba stake, raising over $4 billion in the process. Of that, $3 billion was dedicated to buying back stock, while just over $1 billion was put towards acquisitions.

Yahoo! Inc. (NASDAQ:YHOO) still owns over 20% of Alibaba, and when the company goes public, Yahoo! will get another cash windfall.

Buybacks vs acquisitions

But what Yahoo! Inc. (NASDAQ:YHOO) does with that money is key. If Loeb was still heavily involved, it might have been mostly distributed to shareholders. But if he’s out of the picture, it will probably be put towards buying more companies.

About a week after Loeb joined Yahoo! Inc. (NASDAQ:YHOO)’s board, the company announced that it would be selling about half of its Alibaba stake and returning “substantially all” of that to shareholders.

Then Mayer was hired. And in August, Mayer was said to be considering keeping the Alibaba money, and using it solely for acquisitions. Shareholders didn’t like that — the stock tumbled 5%. Ultimately, a deal was struck wherein Yahoo! Inc. (NASDAQ:YHOO) returned about $3 billion to shareholders via a buyback, and just over a billion was kept for the purpose of acquisitions.

A Reuters report, citing unnamed sources, claimed that Loeb supported Mayer’s decision to consider acquisitions instead of a buyback. But I’m skeptical.

Yahoo! Inc. (NASDAQ:YHOO)’s Alibaba stake was Loeb’s key focus in his original presentation. He called it a “promising, overlooked asset” and said it was worth $5.24 per Yahoo! share. In contrast, Loeb derided the core Yahoo! business for stealing the spotlight, and offered only vague suggestions for its improvement (become a “social gaming host” or “video aggregation platform”).

Now that Loeb is selling the bulk of his stake, less than two years after buying in, it seems pretty clear that his Yahoo! Inc. (NASDAQ:YHOO) investment was a cash grab.

Yahoo!’s core business shows promise, but continues to struggle

Of course, returning cash to shareholders is probably the best way to unlock Yahoo!’s value in the short-run.

Although Yahoo! Inc. (NASDAQ:YHOO) shares surged after the company reported earnings earlier in July, core Yahoo! didn’t have much to do with it. Mayer may have turned around the company’s culture and changed its image, but it hasn’t translated into meaningful financial improvement just yet.

Yahoo! Inc. (NASDAQ:YHOO)’s ad prices fell by 12% in the second quarter as its share of the search engine market declined. The company cut revenue guidance for the year. As BGC analyst Colin Gillis noted, “the hard work is still ahead” and core Yahoo! is still “struggling.” That said, Mayer has had only a year on the job, and corporate turnarounds take time.

Already, under her leadership, Yahoo! has revamped its webmail, updated its news feed, and redesigned Flickr. Tumblr could form the basis of Yahoo!’s social strategy, but it hasn’t yet been fully integrated into the Yahoo! family. At the same time, Yahoo! has been buying up dozens of small companies in the hopes of strengthening its workforce.

These initiatives are likely what’s best for Yahoo! Inc. (NASDAQ:YHOO) (and therefore its shareholders) in the long-run.

What could Yahoo! acquire?

But despite all the companies Yahoo! Inc. (NASDAQ:YHOO) has bought recently, the shopping spree may not yet be over. And if Yahoo! is about to get billions from Alibaba’s IPO, there’s a lot that it could afford.

Non-publicly traded companies like Vimeo, Pinterest, Twitter or Foursquare might be most likely, but there are some publicly traded companies that could be considered.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...
X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!