Why Sprint's Softbank Deal Is Good for Yahoo!

NEW YORK (TheStreet) -- SoftBank (SFTBY:OTC) just dropped $20 billion to buy control ofSprint Nextel (S).

One of the implications of this deal, some observers have concluded, is that SoftBank will now no longer be able to do a deal to buy back Yahoo!'s (YHOO) stake in Yahoo! Japan, which SoftBank also controls.

Not so fast. There are several ways the Sprint deal could be good for Yahoo! shareholders.

Read the full post on TheStreet

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What Will Happen Next at Yahoo!

Here is one critical aspect of a Yahoo! cash-rich split that could unlock $20 billion in value that has been overlooked in all the coverage of Yahoo!

Read the full Forbes post

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How a "Cash-Rich Split" Could Take Yahoo! to $41/Share

The best option for Yahoo! shareholders is the company disposing of its Asian assets in a structure called a "cash-rich split."  Here's how it could work and turn Yahoo! into a $41/share stock.

Read the Forbes post

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2 Big Misconceptions About Yahoo!

An update from Eric Jackson: The Wall Street Journal reported a "scoop" overnight that Yahoo! could potentially save billions on disposing of its Asian assets through something called a "cash-rich split." I first reported on this structure for TheStreet six weeks ago, as it had been actively pushed as a viable option by shareholders (including me) to the intransigent board since the summer.


Read the full post in TheStreet here.

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2 Big Misconceptions About Yahoo!

NEW YORK (TheStreet) -- Over the last week, there has been a lot of speculation about whether and how Yahoo! (YHOO_) might get acquired.

The hounds have been circling the prey. There's clearly a lot of value embedded within Yahoo!'s core business, its stake in Alibaba Group and in its stake in Yahoo! Japan.

However, there are many misconceptions shared in the mainstream media, including the venerable Wall Street Journal, surrounding some aspects of how value might be unlocked. Let me correct these misconceptions.

First, let's talk about if Microsoft (MSFT_) or any other company was to swallow Yahoo! whole. Some have speculated that such a move would trigger a change-in-control clause that's part of the 2005 investment between Yahoo! and Alibaba Group. If that was true, Alibaba Group (or stakeholder Softbank) could object to such a deal and have a "right of first refusal." That would lower the value of Yahoo!'s 40% stake in Alibaba Group.

Yet, I've spoken to investors in both Microsoft and Yahoo! -- some of whom have spent a lot of money on multiple law firms to go through the agreements -- and they are firmly of the opinion that this view is false. When Microsoft proposed acquiring Yahoo! back in 2008, a "change of control" clause would not have been triggered because Yahoo! would not have ceased to exist. The company would have continued as an operating entity under Microsoft. Microsoft would have gained full access to the Alibaba Group (and Yahoo! Japan) stake. Jerry Yang would have remained on the board. Yahoo! would still have the right to appoint a fifth member to the Alibaba Group board.

The Tax Fallout

The second misconception is around what the tax implications are for Yahoo!'s stake in Yahoo! Japan and Alibaba Group. Several media reports have indicated that these tax issues are weighing on Yahoo!'s ability to spin off or dispose of these assets.

If Yahoo! has any plan to dispose of its Alibaba Group stake, they certainly haven't said anything along those lines, even though I've spoken out in favor of them selling 10% of their stake (4% of Alibaba Group overall). However, Yahoo! has been talking about unloading their stake in Yahoo! Japan since at least January -- and yet, they haven't done it, frustrating investors.

Read the full post here on TheStreet.com

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How is Jack Ma Viewed Within China for What He Did to Yahoo!?

Many inside China, as well as outside, fear Jack Ma because of his and his company's market power.

Read the full post here on Forbes.

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CNBC: Yahoo: Searching for New Leadership

Here is my CNBC appearance on Squawk Box from earlier today about the Yahoo! shareholder meeting happening later today:

[Rest in Peace: Mark Haines]

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Why Either of these Two Asians Should Be Yahoo!'s Next CEO

Yahoo! doesn't need another boring and ineffective American to lead it. Let's let an Asian take the wheel - and finally unlock some value for Yahoo! shareholders.

Read the full post here at Forbes.

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If China Stocks Are Being Revalued, Why Not Yahoo!?

By Eric Jackson04/20/11 - 08:00 AM EDT

NEW YORK (TheStreet) -- China Internet stocks are on fire. The unstoppable SINA(SINA_) is now up 106% year-to-date. SOHU(SOHU_) is up 56%. Baidu(BIDU_) is up 53%. Even new IPO Youku (YOKU_) is up 94% year-to-date.

We are now starting to see new Chinese companies rushing to list their stocks on the U.S. exchanges.Dangdang(DANG_) has managed to hold a price at a big premium to its December IPO. Qihoo 360(QIHU_) is another high-flying IPO from last month. RenRen(RENN), the "Facebook of China," is planning to list next month.

The more these relatively smaller stocks go up, the more it seems that the bigger Chinese portal names keep going up. Look at Sina's performance in the last two weeks alone for evidence of that.

China observer and investor Bill Bishop said on Tuesday that he thinks there is a revaluation going on in the Chinese Internet sector:

Most U.S.-Listed Chinese Internet stocks are soaring, with some up 10%+ Monday, and some up 30% or more in a matter of weeks. Many of these firms, like Baidu and Sina, have great businesses and massive growth prospects, but the surge seems to be about more than just fundamentals.

Are investors in relative valuation mode, believing that because immature firms like Youku (6.7B market cap), Qihoo (3.7B) and RenRen (planned IPO valuation is $4B+) are so richly valued, then Sina, Baidu, Sohu, Shanda et al are dramatically undervalued on a relative basis?

There is logic to that argument, and it can sustain high valuations for a while, especially given the great wall of money that is both being reallocated to China by Western funds and is sitting in Chinese hands looking for speculative opportunities.

I agree with his logic. I think this revaluation is going on.

And I agree with him that this is not a bubble. It could grow into one -- but we have a long way to go. In "dot com" era terms, I would characterize the current Chinese tech sector as being in the equivalent of the fall of 1995. Netscape went public that year in August. As its price held up for the first few weeks after, it made people reconceptualize the value of tech.Yahoo!(YHOO_) went public in April 1996. And, after that, the race was on for tech billions.

But it would not be for another 3.5 years after Yahoo!'s IPO that the "dot com" bubble burst.

I think we still have another four years of growth ahead of us in the Chinese tech world. Buckle up: it's going to be a fun ride.

But, here's a question for you: If there is a revaluation going on in the Chinese Internet world, it has so far eluded the biggest Chinese Web company in the world (at least, as I see the Chinese Web world playing out over the next five years).

Tencent and Baidu may be the big dogs today with $50 billion market capitalization each. And they will likely triple in size over the next five years, as the wealth of Chinese people increases and Internet penetration doubles or triples from its current levels.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Yahoo! Gets Smacked by Japan Disaster

By Eric Jackson, Senior Contributor03/16/11 - 06:00 AM EDT

NEW YORK (TheStreet) - Yahoo!(YHOO_) was taken to the woodshed Tuesday morning following the overnight fear of a nuclear meltdown in Japan.

The stock touched $16.04 in early trade Tuesday after closing at $17.67 last Wednesday. The stock is being smacked down because of its ties to Yahoo! Japan. It's a major over-reaction.

Yahoo! has made it clear since its earnings call in January that it is exploring how to most tax-efficiently monetize its stake in Yahoo! Japan. Investors in the company have been calling for this for some time.

CFO Tim Morse reiterated a few weeks later to aGoldman Sachs(GS_) conference that Yahoo! was working closely with Yahoo! Japan owner Softbank on the best solution for doing this.

It appeared, based on the price action in the stock last week, that a deal between Softbank and Yahoo! was imminent, giving Yahoo!'s stock a major boost. However, the Japanese earthquake and aftermath have smacked down the stock.

Yahoo! Japan's stock was down 17% from last Wednesday to Tuesday. The biggest part of the drop came on Tuesday alone. Yahoo! Japan (ticker 4689 in Tokyo or YAHOY on the pink sheets in the US) ended Tuesday down 8.3% -- but, at the height of the panic, after the Nikkei re-opened after lunch, Yahoo! Japan was down more than 15% like the overall market over there. It rallied in the afternoon session.

There is no reason for Yahoo!'S early drop Tuesday - more than 7%, significantly more than the U.S. market -- other than following Yahoo! Japan in sympathy. That was much more severe of a drop compared toGoogle(GOOG_) or Apple(AAPL_).

One media outlet on Tuesday speculated if the large drop meant that someone knows that a deal with Yahoo! Japan is not going to happen or that a deal is much more complicated than first thought.

Everyone needs to take a pause.

Yahoo! Japan's exposure to a Japanese GDP slowdown is likely much less than other consumer discretionary names -- especially at the high-end (like Tiffany(TIF_) and Coach(COH_) -- yet it has been dumped in the same way as every other Japanese manufacturer.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Earthquake Won't Shake Tech Stocks

By Eric Jackson
RealMoney Contributor
3/14/2011 8:00 AM EDT
Click here for more stories by Eric Jackson

With the frantic headlines and devastating imagery over the weekend of the Japanese earthquake and tsunami, what are the implications to your portfolio of tech stocks and Chinese stocks?

I believe we are nearing the end of the uncertainty weighing on the markets over the current nuclear concerns. If we were focused on rebuilding, the markets would be having an easier time moving forward. As it is, we are still not sure of the situation with the nuclear reactors. Every time the word "nuclear meltdown" is used in describing the event unfolding, the market jitters.

But this is not the '80s in Chernobyl. This is modern-day Japan. The fears are outpacing the reality of the situation. By the end of the week, I suspect our fears will have subsided and our full attention will be focused on the improving American economy, not Japan.

I listened in on a conference call of BAML Capital Partners' top Japan and Asian analysts last night. One of their key messages was that the Japan crisis would have little if any impact on the rest of Asia. Yes, China exports a lot to Japan, and the Japanese consumer is going to be in hunker-down mode for a while. Yet this headwind will likely be more than offset by Japan's need for stuff in order to rebuild.

Electronics, basic materials, food, energy. Japan needs them. China will sell them a lot.

It's been interesting to watch over the past week (especially Friday) how a number of Chinese tech names have been performing well. On Friday, there were big gains in Baidu (BIDU - commentary - Trade Now),Sohu (SOHU - commentary - Trade Now), Sina (SINA - commentary - Trade Now), Shanda Interactive(SNDA - commentary - Trade Now), Perfect World (PWRD - commentary - Trade Now), Changyou.com(CYOU - commentary - Trade Now), SouFun (SFUN - commentary - Trade Now), and Shanda Games(GAME - commentary - Trade Now).

NetEase.com (NTES - commentary - Trade Now) was down on Friday but has had a strong couple of weeks since its earnings came out.

Why have these Chinese Web and gaming companies been doing so well, even after the massive earthquake hit at midnight last Thursday night? Despite the jitters about energy in North Africa in the last month, most investors are seeing the strength in all these names with rising advertising revenues and increased game usage from a confident Chinese consumer. Those local factors will trump tragic events next door in Japan.

These companies will continue to see their stock prices rise and fall solely on their own performance and the continued strength of the Chinese economy.

...

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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Why I Love Yahoo!

By Eric Jackson02/23/11 - 08:00 AM EST

NEW YORK (TheStreet) -- I have had a love-hate relationship with Yahoo!(YHOO_) for five years now. I have always thought the stock was undervalued and primed for a turnaround that could unlock value. That's why I longed the stock and led an activist campaign against it. Unfortunately, even though the campaign resulted in former CEO Terry Semel quitting in 2007, the company's board muffed the chance to sign a deal with Microsoft(MSFT_) leading to the company's stock price to collapse. It's really never recovered.

Yahoo!'s new CEO is into her third year at the helm of the Internet company. Most investors and analysts are fixated on her efforts to turn the business around. When you listen to the earnings calls, 95% of the discussion from Carol Bartz and her CFO, Tim Morse, focuses on the wholly-owned business.

Yet, despite the company finally biting the bullet and doing needed layoffs and closing underperforming or overlapping businesses -- things that have been obvious to many for years -- my interest in Yahoo! is purely based on its private stake in Alibaba Group, the parent company of Alibaba.com, Taobao and Alipay.

There has been some general talk among investors who don't follow Yahoo! closely that Yahoo! should "monetize" the Asian assets. By this, I think they are suggesting that Yahoo! divest its stake in Yahoo! Japan and Alibaba Group. There also seems to be a lot of hope that private equity will come in and buy the wholly-owned company. Remember the spike-up in shares we saw a few months ago when rumors circulated that AOL(AOL_) was going to team up with private equity to make a bid for Yahoo!?

To me, all the private equity talk and concern about the current or future health of the Yahoo! core business is a side-show. I believe most of Yahoo!'s largest shareholders believe -- as I do -- that the real value-creation in Yahoo! shares will come when the market sees how big Taobao and Alipay are going to be in the next 10 years.

Let's do a sum-of-the-parts on Yahoo!

Tim Morse discussed last week that they are looking into a tax-free spin-off of their Yahoo! Japan stake. At recent market prices, Yahoo!'s 35% stake in Yahoo! Japan is worth $5.76 per share.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Kyle Bass Interview from January Worth Watching

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Yahoo!: Do The Right Thing for Your Shareholders with Taobao and AliPay

It's been a difficult 7 months for Yahoo! shareholders. Last week's shareholder meeting did little to quell concerns about the company's prospects moving forward.

Yahoo!'s board and management team essentially argued to shareholders in their presentation: trust us; we have a plan and we will execute against it.

I attended the meeting and asked about several governance-related incidents which have happened in the last year and have not been -- in my opinion -- in the interests of Yahoo! shareholders. The whole Vote-Gate announced earlier this week has been even more disconcerting.

It's sad to say, but I don't believe Yahoo!'s board or management team have done enough to deserve our respect and trust. Therefore, we need to continue to be vigilant and speak out for our own good.

I want to make Yahoo! shareholders aware of a potential scandal which has yet to occur. Hopefully, with enough pressure ahead of time, we can ensure it does not become a scandal. It relates to Yahoo!'s Asian assets, which have been much discussed in the last few months as a way of unlocking value for beleaguered Yahoo! shareholders.

As CFO Blake Jorgensen articulated during last week's shareholder meeting, Yahoo!'s collection of Asian assets (from its stake in Yahoo! Japan, to Alibaba in China, and Gmarket in Korea) are worth about $7 / share to Yahoo! shareholders at today's market prices. However, as Blake noted, Yahoo! maintains significant ownership (through its Alibaba stake) in two private Chinese companies: Taobao.com (China's eBay) and AliPay.com (China's PayPal).

Both have huge potential. They already are the leaders in their verticals in China. eBay just retreated from the Chinese market because of their inability to compete. They have also deliberately chosen to grab market-share in the past few years by not charging users fees. As you can imagine, these economics have helped their user-base explode. Neither company has minded doing this, because their costs are very low and they both know that they can turn the meter on at any time with a very large payback.

So, here's the governance issue: how should these assets be valued if Yahoo! wants to extract value from their stake in these private companies? If you valued them today, there are no revenues and negative earnings. If you valued them in a year or two when they each turn their meters on and generate hundreds of millions of dollars, you would have a much more valuable company.

There are two ways Yahoo! might extract value from Taobao.com and AliPay.com:

(1) agree to a Management Buy-out with each company's management or with Alibaba or;

(2) spin-off these assets to Yahoo!'s shareholders.

The latter option is the right thing to do for Yahoo! shareholders. Even if these shares are valued low today relative to what they will be in a few years after they start charging fees, Yahoo! shareholders can decide whether to hang on to them or not.

The Management Buy-out approach could be exploited. Alibaba or the management teams could decide to buy back Yahoo!'s stake at today's artificially low prices -- knowing full well they are buying an asset that will be worth 3 - 6 times as much in a very short time. Who wouldn't want that type of sweet-heart deal?

I do not know what Yahoo! is contemplating with these assets, but I believe sunlight is the best disinfectant. Better to bring this issue to light now and remind them to not even go there, then scream bloody murder after the fact when it's a done deal.

I wouldn't be as skeptical that such a sweet-heart deal might occur if I hadn't witnessed Yahoo! selling its $395 million / year Overture Japan business to Yahoo! Japan (Softbank) for $13 million last August. I asked Jerry about this deal last Friday. He said that Investor Relations had answered my question last year when I first raised it. (They didn't; they merely repeated Blake Jorgensen's public comments during two analyst calls which were vague and provided no clear rationale.) Jerry also suggested to me in his comments that there were "tax reasons" for doing such a deal, without further explaining. (Jerry: If there were such reasons, can you elaborate for the benefit of shareholders?)

Softbank got a great deal for Overture Japan. Alibaba shouldn't get a great deal for Taobao.com and AliPay.com. Yahoo! shareholders deserve to be treated fairly.

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Yahoo!'s Q3 Recap: No Light Really Shed on Overture Japan Sale

Congrats to Jerry Yang, Sue Decker, and Blake Jorgensen (and the rest of the Yahoo!s) for a good Q3 announced Tuesday. Yahoo! shareholders and employees alike finally feel some wind at their backs.

Yahoo! under-promised and over-delivered to the excitement of investors in the after-market which carried through Wednesday's trading. Smartly, management looks to continue this approach in Q4 by keeping their heads low and their guidance lower.

The disappointment amid the good news was net income dropping -- specifically in affiliate revenues and in international. This is troubling when the company stepped on the gas in hiring in the quarter. That's something that definitely needs to be addressed this quarter. Further streamlining the middle-upper management would be a wise place to start, as well as in cuts for Southern California.

I was hoping for greater clarity from Blake Jorgensen on the deal which closed in the quarter whereby Yahoo! sold a $395 million a year business (or at least its sales and marketing operations, if not the de facto business) in Overture Japan to Yahoo! Japan (of which they are a 34% JV partner) for $13 million -- a "very nominal" amount to quote Jorgensen's Q2 call comments.

Here were Blake's relevant comments from Tuesday's earnings call on this topic:

...[L]et me provide additional color on the impact of the Overture Japan transaction. We believe that by enabling the Yahoo! Japan sales team to present a unified offering to customers, this deal will be a significant positive to both parties in the long term. As we discussed last quarter, this transition will reduce our reported GAAP revenue and TAC in Q4 and into 2008, resulting in a modest net decrease in revenue ex-TAC.

Yahoo! Japan will pay us a service fee for providing search advertising and support services, and we expect this transaction to be slightly positive in OCF in the short term compared to our previous affiliate arrangement with Yahoo! Japan. As we mentioned in July, we received a small upfront payment and we believe that the majority of the value of this deal will be realized via our long-term relationship with Yahoo! Japan.

It's not clear to me how the transaction allows for a presentation of a more unified offering to Japanese customers than a joint sales call with someone from Yahoo! Japan and someone from Yahoo! (Overture Japan). At the end of the day, the customer was dealing with Yahoo! Japan, not Google or Microsoft, for a discussion of how they could be best served by Yahoo! Japan.

As there will a "modest net decrease in revenue ex-TAC" through at least 2008, why did Yahoo! do this deal? Jorgensen offers two reasons in his next paragraph:

1. Slightly positive OCF in the short-term, presumably through the new "service fee" paid by Yahoo! Japan to Yahoo! Yet, it's not clear how this new service fee operates and how "slightly positive" the impact on cash flow will be.

2. The assurance of a continued, longer-term relationship with Yahoo! Japan. The implication of this benefit is that the relationship conceivably could have ended. I suppose the doomsday scenario is that you would have been searching for sushi in Tokyo through Yahoo! Japan with results delivered to you by Ask's algorithm. It's hard to imagine that Yahoo! would have let itself get into such a weak negotiating position to allow that scenario.

Unfortunately, none of the Wall Street analysts chose to ask about this during the Q&A session following the prepared remarks. Therefore, Yahoo! shareholders are still left wanting a more complete explanation.

Henry Blodget was curious why international revenue growth in the quarter decelerated from 15% to 9%. Here is a hypothesis: a $395 million annual revenue business (Overture Japan) that was sold off on August 31st wasn't able to contribute $32.5 million to Yahoo!'s last month of Q3. With that extra $32.5 million, Yahoo!'s Q3 international revenue would have been $608.3 million -- or a 15% growth rate over the previous year's Q3.

On the one hand, that's some comfort to Yahoo! shareholders in guessing why the drop. However, it still doesn't help us better understand the rationale for the Overture Japan deal in the first place.

Let's hope we don't have to wait until shareholders can push aside the analysts to ask these questions for themselves at next year's Yahoo! Annual Meeting.

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Follow-Up on Yahoo! Japan Deal for Overture Japan

In posts earlier this week, I questioned why Yahoo! had sold Overture Japan to Yahoo! Japan for $13 million when that business was doing $395 in annual revenues.

One of the rationales for the deal, explained by Blake Jorgensen on the last earnings call, was that there would be better alignment of the sales teams by combining them.

One of the questions I raised was why -- when Yahoo! Japan and Overture Japan are in the same Minato City neighborhood in Tokyo. Yahoo! Japan office is in Roppongi Hills Mori Tower, 10-1, Roppongi 6-chome, Minato-ku, Tokyo and Overture Japan's office is in 4-3-1, Toranomon, Minato-ku, Tokyo.

A colleague of mine in Tokyo confirmed the proximity of these offices:

"Roppongi and Toranomon are very close. It will take 6 minutes train and 3 to 8 minutes walk."

So, this move would be the equivalent of taking one team located in, say, Santa Clara and aligning them with another team in Sunnyvale. That would make sense if Yahoo! didn't already have expertise in working with teams spread around the state (between Burbank/Santa Monica and Sunnyvale), as well as around the world.

The point is that there must be something else much more significant behind doing this deal for Overture Japan now at this price. Shareholder will be looking for greater clarity on the next call in about a week.

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More Questions on "Sale" of Overture Japan KK to Yahoo! Japan

Last week, I published a post (in response to a suggestion from a Yahoo! "Plan B" supporter) focusing on the recent sale of Overture Japan KK by Yahoo! to Yahoo! Japan. I complained that the sale price of just over $13 million was way too low for a company that did $395 million last year.

I was contacted by Yahoo!'s Investor Relations (IR) team the next day. I signed an earlier NDA with Yahoo! (due to previous discussions I've had with them this year) which prevents me from disclosing information they reveal to me which isn't public. Therefore, I want to respect that, but I did speak with them yesterday and had an opportunity to further press my case that they share more information to shareholders. They attempted to better explain the deal to me. Obviously, they believe this is a good deal for shareholders and they made their case for it. However, I -- and shareholders -- need more information from the company before coming to a conclusion.

So I call upon Yahoo! to share more information on this deal publicly -- even before the Q3 earnings call -- so that all shareholders can review it. The way this transaction has happened -- with only a release to date from Yahoo! Japan and no public comment from Yahoo! since then -- creates questions in the minds of shareholders that Yahoo! shouldn't allow to linger.

There was nothing in Yahoo!'s last 10-Q on the Overture Japan sale because the deal hadn't closed yet. The only public comments to date on this subject came from Blake Jorgensen during the last earning call. Here is a summary of those comments:

Let me spend a moment on our pending deal with Yahoo! Japan. We've been working towards transferring ownership of the sales operations of Overture KK in Japan to Yahoo! Japan. We're excited about this transaction because it should allow us better alignment of search and display advertising sales in Japan, making the business more competitive and essentially securing a favorable and very long-term revenue stream to Yahoo!.

The terms are not yet final, but once the deal closes, you will see several changes in our financial statements. We will no longer pay TAC to Yahoo! Japan and they will instead pay us a service fee, which we expect will be included in our marketing services revenue. As a result of the transaction, our GAAP revenue is expected to be between $200 million and $250 million lower in the back half of 2007 and TAC will come down commensurately.

Revenue ex-TAC will decrease modestly under the new structure as the new service fees will largely offset the lost affiliate revenue. The impact to operating cash flow is expected to be broadly neutral near term, but accretive for both companies long term, versus our prior arrangement. The transaction is structured to deliver value through a long-term service fee arrangement with only a very nominal upfront payment to us.

So, given only these details of the transaction (which are here), my questions as a Yahoo! shareholder to Blake are as follows:

• Why did Yahoo! do this deal in the first place? How are Yahoo! shareholders better off today versus prior to August 31st (when the deal was announced)? Better "alignment" sounds great, but why can't you get people aligned when they work in very close proximity in the same Tokyo neighborhood? Yahoo! Japan office is in Roppongi Hills Mori Tower, 10-1, Roppongi 6-chome, Minato-ku, Tokyo and Overture Japan's office is in 4-3-1, Toranomon, Minato-ku, Tokyo (in other words, the same Minato neighborhood). Beyond alignment, and given that Yahoo! received the "very nominal" $13 million for Overture Japan and that Yahoo!'s go-forward "revenue ex-TAC will decrease under this new structure," why do this deal? How are Yahoo! shareholders better off?
• Was Yahoo! at Risk of Losing the Paid Search Business for Yahoo! Japan? The only reason I can imagine for doing this deal from the Yahoo! perspective is the risk that they might lose the "favorable and very long-term" business from Yahoo! Japan. However, if that's true, how could Yahoo! have let itself get into that position in the first place? It seems inconceivable that Yahoo! -- when it was first negotiating an agreement with Softbank 10 years ago to set up Yahoo! Japan -- would allow Softbank (or Yahoo! Japan) to turf out Yahoo! in the future in favor of using a competitor for some services. In Yahoo!'s defense, the company didn't compete with Google 10 years ago and didn't have any idea that paid search would be as big an area as it is. Perhaps it is possible that Yahoo! Japan had this "out card" and decided to play hardball with Yahoo! If this is true, it raises questions about how Overture Japan's relationship was set up in the first place with Yahoo! Japan after Yahoo! acquired Overture in 2003.
• Is there a difference between "transferring ownership of the sales operation of Overture Japan KK to Yahoo! Japan" and selling Overture Japan KK to Yahoo! Japan for US$13 million? Blake's language specifically doesn't state that this is a sale. However, if Yahoo! has transferred ownership of the sales operation to Yahoo! Japan, what's left of Overture Japan KK? Isn't this a de facto sale? If it is a sale, how does Yahoo! justify this "very nominal" sales price of $13 million for a $395 million a year business?
• How does this deal in and of itself create more cash-flow for Yahoo! and Yahoo! Japan in the long-term? The language above from Blake implies that Yahoo!'s near-term revenue ex-TAC will take a hit, although cash flow will be "broadly neutral." Yet, both companies are supposed to see the deal be long-term accretive for cash flow. This deal appears to be about moving around how revenue, costs, and marketing service fees are reported from an accounting perspective, but I haven't yet seen such a deal between two JV partners which in and of itself made more money (or cash flow) to be shared between the partners than what existed before the deal. If this is the case here, how does the deal create more cash flow for both long-term?
• How are Revenue and TAC calculated between Yahoo! and Yahoo! Japan? As of March 31st, 2007, Yahoo! Japan had a trailing 6 months of revenue of $945 million (or about $1.9 billion annualized). Yahoo! recognizes 34% of this revenue itself on a trailing basis (as per its ownership stake in Yahoo! Japan) -- or $642 million of the annualized amount. That's roughly 10% of Yahoo!'s overall annual revenues. Yahoo! Japan reports TAC of about 28% of its revenues of $529 million of the earlier annualized amount. More light needs to be shed on how these two companies calculate revenues and costs both ways through their JV and what is changing under this new agreement. Blake's comments suggest that Yahoo!'s revenues ex-TAC will decrease from this deal, but that Yahoo! Japan will increase its service fees to Yahoo! He also says that affiliate revenue to Yahoo! will decrease. Can we get some more details on how all of this will actually play out? Is Yahoo! Japan -- in addition to sharing 34% of its revenues with Yahoo! -- also paying Yahoo! a fee for use of Overture Japan, which is additional revenue to Yahoo!? If so, how significant is this to Yahoo!? Is this the revenue that will now become the "service fee" under this new agreement reported as "marketing services revenue" by Yahoo!? Until we really understand what is happening under the terms of the deal, it's difficult for a Yahoo! shareholder to judge the benefits or negatives of the deal.

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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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