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
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!