Last week it became obvious that the two largest US telcos are both in competition to acquire Yahoo, as both look to stimulate new growth by developing their own content and services. AT&T has made a bid, according to reports, but Wall Street still sees Verizon as the frontrunner to buy the ailing internet business, despite it not bidding the highest value on the previous round of bidding.
Turning to content, when growth and margins on connectivity are under pressure, is a tactic which operators adopt periodically, but rarely with much success. The mobile portals of the late 1990s, the experiments with mobile TV, the attempts to secure the upper hand over SIM-based services like NFC m-payments – in all cases and more, only a few operators, mainly in Japan and Korea, have made a significant business out of content and apps. However, this time for the two US giants, it looks like there is no other game in town, but a price war with its smaller US rivals, so content it is.
And in the US, Verizon and AT&T will have to compete not only with their traditional content partners, but the cablecos, which until AT&T acquired DirecTV, had clearly superior programming deals and plus their expansion into WiFi-first wireless and of course, the over-the-top providers like Amazon.
And to make the market more crowded and confusing, Google and Apple are also beefing up their mobile and multiscreen content offerings, with Apple rumored to be interested in buying Time Warner for its HBO and Warner Brothers brands; and Google expanding YouTube and Play into many new areas.
Yahoo would certainly not address all these challenges – despite a mobile-centric apps and content strategy which looked convincing on paper, it continues to lag behind the web giants. But like Verizon’s acquisition of AOL and AT&T’s very different one of DirecTV, it would fill some holes and be a quick route to new revenue streams and partnerships.
According to Bloomberg sources, AT&T had previously decided not to bid directly for Yahoo, but was relying on its stake in advertising company YP Holdings, which was trying to negotiate a merger with part of Yahoo. However, YP has now abandoned that plan, drawing AT&T into the race in its own right.
Second round bids will close this week, and it has not yet been announced if a third round will take place. Yahoo has reportedly received more than 10 initial bids ranging from around $4 billion to $8 billion. The higher offers have come from private equity firms which would have less to bring to Yahoo, in terms of market understanding and strategic fit, than the telcos. Among these are said to be TPG, a group backed by Warren Buffett, and a team financed by Bain Capital and Vista Equity Partners.
An ambitious bid from the Daily Mail newspaper group in the UK, which was recently rumored, now looks to have taken a back seat, but other firms may also be hoping to boost their online presence in the US with these assets. Although Yahoo isn’t as strong as it once was, it is still the fifth most viewed website in the US, ahead of Wikipedia, Ebay, Twitter, and Netflix.
Verizon is preferred by many analysts because of the potential synergies with AOL, but AT&T will be looking for its own internet advertising and content engine, so it may well try to outbid its rival.
The number of bidders could push Yahoo’s price up, but after a very bad first calendar quarter, many analysts think the value of the firm’s core assets, in search and content, will have fallen.
Yahoo’s social media assets such as Tumblr and Flurry, as well as other online businesses, are referred to as ‘Mavens’ – Mobile, Video, Native and Social ads. Revenues from the Mavens business arms increased 6.8% year-on-year in Q1, but growth has slowed significantly from 60% in Q2 2015, 43% in Q3 2015, and 26% in Q4 2015. Yahoo wrote off its goodwill acquisition of Tumblr in February, with $750 million in value being burned in the process.
Initial bids, made back in February, were said to be as high as $8 billion for the core assets, but the quarterly figures for the whole firm saw revenue fall by 18% to $859 million, while Yahoo also lost a $100 million annual web hosting contract with AT&T. So those assets could be down to $3 billion or even less in the second round of bids, now under consideration.
Yahoo’s market cap of $35bn is largely down to its 15% stake in Chinese internet and retail giant Alibaba, and the move to spin off its core business will leave a shell company comprised of the Alibaba stake alongside the quite substantial Yahoo Japan holding, without the core businesses.
It is possible that CEO Marissa Mayer and her board may reject all the offers, if they are too low, and embark on a different strategy, though she would have to come up with something very credible, given the failure of her apparently solid turnaround plan in 2015.
But a major incentive for Yahoo to separate its core business and the Alibaba stake is due to the continued decline in the Chinese economy. Given that around $10bn of value has disappeared since Yahoo first floated the idea of spinning the stake out, the company may want a speedy conclusion to the uncertainty over how much its Alibaba holding is actual worth day-to-day.