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): http://ir.yahoo.co.jp/en/release/20070831/ . 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:

• Blue Lithium: Y! Inc paid $300 million for this company which is estimated to have annual revenues of roughly $100 million (source: http://money.cnn.com/2006/09/15/technology/disruptors_bluelithium.biz2/index.htm ). That a price-to-sales ratio of 3. Ok, reasonable.
• Zimbra: Y! Inc paid $350 million for this company which is estimated to have annual revenue of $6 million (source: http://www.news.com/8301-10784_3-9780434-7.html?part=rss&subj=news&tag=2547-1_3-0-5 ). That values the company at price-to-sales ratio of 58.3, so Y! Inc must have some pretty rosy expectations about the growth that Zimbra will see over the next couple of years.
• Overture (now Yahoo! Search Marketing) was bought by Y! Inc for $1.6 billion in cash and stock in October 2003 (here's a press release from Y! Inc's Press Room: http://yhoo.client.shareholder.com/press/releasedetail.cfm?ReleaseID=119517 ). For that year Overture was expected to have revenue of $1 billion (as Overture became a fully owned subsidiary of Y! Inc, separate figures for Overture were not filed). This valued Overture at price-to-sales ratio of 1.6.

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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