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Richard Windsor
15 December 2016

Yahoo – Calculated gumption

Even if Verizon walks, there is value in Yahoo.

 Yahoo has revealed yet another hack casting further doubt over its deal with Verizon, but thanks to Alibaba, there still remains a good opportunity for those with a calculator and a bit of gumption.
 Yahoo’s latest revelation involves yet another hack, this time twice the size of the previous one with an estimated 1bn user accounts affected.
 To me, this looks like essentially all of Yahoo’s users have had their details stolen with half of them having suffered the indignity twice.
 This latest event appears to have occurred over three years ago in August 2013, and worryingly, Yahoo has no idea how the incident occurred or what went wrong.
 Alongside 1bn users, are 150,000 accounts belonging to US government, military and law enforcement personnel who have given Yahoo their professional contact details in order to unlock their accounts in the advent of a lost password.
 For the last 10 years Yahoo has neglected its Internet assets but has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
 It is this engagement that Verizon is paying $4.8bn for but we think that this latest hack is just another reason for users to finally wash their hands of Yahoo and use something else much safer such as Gmail, or
 Furthermore, Yahoo has been experiencing a fall-off in traffic, falling one place in Alexa’s global rankings from No. 5 to No. 6, which is an initial indication that users have already started to leave.
 Consequently, we think that Verizon has a fiduciary duty to its shareholders to at least demand a discount on the acquisition price or risk an ignominious write off not unlike that suffered by HP after its acquisition of Autonomy.
 Fortunately for the shareholders of Yahoo, no such write-off is likely as the core business now makes up only a tiny part of the valuation of the company.
 This comprises:
 Alibaba in which Yahoo owns 383.6m shares with a market value of $34.9bn.
 Yahoo Japan in which Yahoo owns 35.5% with a market value of $7.6bn.
 Net Cash of $5.3bn.
 Patents which we have previously valued at $500m but are becoming increasingly concerned that they are of little value.
 Hence, we are reducing Yahoo’s patent value to zero.
 Core business for which Verizon is nominally paying $4.8bn but given the risk that it walks away, we are now valuing it at zero.
 This sum of the parts calculation values the equity of Yahoo at $47.8bn which with 948.5m shares in issue gives a price per share of $50.4.
 This is some 23% above where the shares are currently trading meaning that, even in the advent of Verizon walking away and the core business imploding, there is still significant upside in the shares.
 Yahoo looks very attractive but it will stake someone with gumption to risk real money in the shares.

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