Private equity firms are swarming around Yahoo, eyeing partnerships with firms such as Alibaba and Microsoft to finance a deal. Yet the benefits are questionable. The best match for Yahoo might lie in an unexpected suitor -- Apple.
It is widely assumed that a deal for Yahoo would involve buying the firm for about $20 billion, releasing over $9 billion by selling off Yahoo's Asian assets and liberating $3 billion in cash from the company's books. The resulting $12 billion could be used to pay off the debt used by a private equity firm, or simply to reduce the price tag for a cash-rich company such as Microsoft. The $7-8 billion or so remaining in the deal cost would be the value of the core portal site. So far so good, but these economics are available to any buyer. For the deal to be worthwhile to private equity firms, there would need to be even more debt that future earnings could pay down. That's a problem. Private equity tends to favor deals in stable industries with predictable cash flows that can pay down debt, and even Silicon Valley's wild-eyed optimists would have trouble making that claim about Yahoo. Alternatively, private equity can provide companies beset by short-termism with a clear medium-term roadmap for turnaround. This hasn't been Yahoo's issue, though. Few investors in the stock have expected a nice stream of gradually improving quarterly results; they have demanded bold action for some time.
What could really turn Yahoo around is more opportunity to use its rich content, which would generate more ways to leverage advertising. Microsoft could offer some of this via Skype, cloud services, and its renewed push into mobile operating systems. The companies already have a substantial partnership, with Bing providing search technology to Yahoo and Yahoo supplying traffic to Bing. But Microsoft doesn't make money from Bing and MSN, and it may not crave trying to salvage Yahoo's deteriorating platform. The company has long wanted to be a content and search powerhouse, but unless Microsoft can show that it can drive eyeballs to its sites there may be little sense in doubling down the bets, especially given that the current partnership already provides many of the potential synergies between the companies.
Apple is in a very different position. The company could make Yahoo its default content provider across a wide range of devices. Yahoo content -- and ads -- could be linked to users' iCloud accounts, and ads could also be targeted through the enormous quantity of data Apple can capture about users' tastes and living patterns. Two new businesses might make a deal especially attractive. Siri can amass an unprecedented wealth of information about users' wants and preferences, and it will open up new occasions for advertising linked to local search, data queries, birthday reminders, and innumerable other events. A forthcoming Apple television, strongly hinted at in Walter Isaacson's new biography of Steve Jobs, would create an ocean of opportunity for targeted ads, partly sidelining the dysfunctional system of TV advertising that is a legacy of decades past.
What stands in the way of this vision? Plenty, but perhaps not too much. A Yahoo deal would be a big business model break for Apple, yet the company has been steadily amassing assets that facilitate new revenue streams for some time. Yahoo's design principles -- think of crowded, busy pages -- are antithetical to Apple's; that's an eminently addressable challenge. The Microsoft partnership would need to be wound down, and Apple clearly has the long-term orientation to sort that out.
Is this vision too radical? Really, we should stop asking that about our friends in Cupertino.
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