Thursday, September 27, 2007

Did Softbank Get a Sweetheart Deal from Yahoo! for Overture Japan?

One of the supporters of our "Plan B" for Yahoo! Group, David Sollers, recently contacted me to share some analysis on the recent sale by Yahoo! to Yahoo! Japan of Overture Japan. The whole issue of this sale has been ignored by analysts and the press. I would hope that Sue Decker and Blake Jorgensen would address this issue and clarify it in a few weeks on the Q3 earnings call. I'm sharing with the larger "Breakout Performance" community...

On August 31, Overture Japan was sold to Yahoo! Japan (a joint venture between Yahoo! Inc and Softbank Corporation of Japan - Y! Inc has 34% stake in Yahoo Japan).

While there was no information at all anywhere on Yahoo!'s site (it should have been on the Press Room section of the corporate site), it was something that Yahoo! Japan made a big deal out of in the Japanese language press.

Even the English version of Yahoo! Japan's investor relations press releases site includes this announcement (pdf document): . In that PDF document, the terms of the sale are detailed.

Now, while I was against the sale of Overture Japan to Yahoo! Japan on principle (because it is a large market - second only to the US - where Yahoo!/Overture still has a larger market share than Google in paid search), the ridiculously low share price is something that all YHOO shareholders should be upset about.

According that press release, Overture Japan, which had revenues of JPY 45.767 billion (US$ 395 million), was sold for JPY 1.557 billion (US$ 13.426 million). That is a price-to-sales ratio of 0.034 for a profitable company with great sales growth (2005 and 2006 figures for Overture are detailed in the press release - and while net income decreased from 2005 to 2006, that can only be due to one-time charges and/or expenses which are not like to re-occur in 2007, most probably investement in hardware needed for the launch of Panama).

When was the last time you heard of a profitable company being sold off for a small fraction of its annual revenues? That price-to-sales ratio is so low that someone at Y! Inc ought to be fired. At least that is my reaction, and I would expect other shareholders to be similarly outraged.

If Y! Inc valued itself that this price-to-sales ratio (instead of the 5.3 at which it is currently valued), they'd be selling a share of YHOO for less than 20 cents per share!

Why was Overture Japan sold at this kind of "fire sale" price? Y! Inc definitely cannot be that badly in need of cash.

Let's take a look at some of Y! Inc's recent acquisitions:

So by measure of these acquisitions, Y! Inc did indeed sell Overture for a price that was way way way to low. If we value Overture Japan at the same price-to-sales ratio that Y! Inc paid for Overture just four years ago (which is probably a reasonable valuation), we arrive at a sale price of $631 million.

So Y! Inc has sold off a profitable subsidiary for $13.4 million, when the price should have been in the range of $500 million to $1 billion.

Shareholders want to know why Masayoshi Son of Softbank received such a good price for such a valuable ad engine?

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dogcatcher said...

Softbank/Yahoo Japan doesn't just get the ad engine, they get an established business that is growing.
And at that price? wtf?
Why would Y! Inc sell Overture Japan in the first place? Didn't they just make a big deal about having launched Panama in Japan - a huge market second only the US and all - around the time Q2 results were released?
What the heck are they smoking over there in Sunnyvale?
Someone's got some explaining to do!

Anonymous said...

Well, could it be that Masayoshi-san is the better negotiator?

Rodent said...

This has gotta be some kind of a sweetheart deal. And it looks like it all happened under the radar. And who gets screwed? Long-suffering YHOO shareholders, of course.
Where was the financial press when all this was happening? It looks like it was a done deal before the first word became public.

Anonymous said...

I admit I'm chuckling as I read your postings while eating my popcorn.


Because these days, public companies are the worst place for investors. No matter if you change the players (such as removing Semler from Yahoo), common stock holders will never hold any power.

And when the people who do have the power decide it's time to move on, common stockholders will be left holding the bag.

If anything, figure out which employee-owned companies are worth investing in. It's time for bottom-up investing, not top-down control.

The US would be much better off if they cut off all the tax incentives and tax breaks for ALL public companies. They've turned into leeches off the public trust and that's the worst thing that can happen. Besides, do profitable companies like WalMart need another tax break? Didn't think so?

wall st duck said...

This has been on your site for a couple days, and still nothing in the "so called" mainstream press.

Now that Q3 has ended, it will be interesting to see if this is included any of Yahoo!'s Q3 filings, conference calls, or in some other way acknowledged by Yahoo!.

I can't help thinking there's more to this story, and that Yahoo! must be getting more from Softbank/Yahoo Japan. For YHOO shareholders, I centainly hope that's the case.

This all makes you wonder: what other kind of deals has Yahoo! done that haven't made the news or havent been mentioned in Y!'s own press releases?

Eric Jackson said...

Thanks for the comment.

I was contacted by Yahoo!'s IR department about this story and they presented their response. It's difficult to make an argument and then respond to it without the numbers to back it up.

I will summarize in the coming days. However, this will definitely need to be further explained over the coming weeks.