March 2014 - Investment Banking Firm - M&A, Fairness, Valuation & Advisory in Miami

Yahoo’s Alibaba Cash Enables Tumblr-Sized Deals: Real M&A

March 18, 2014

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By Tara Lachapelle
March 18, 2014

Alibaba Group Holding Ltd. may give Marissa Mayer a $10 billion chance to accelerate her dealmaking.

Since Mayer became chief executive officer of Yahoo! Inc. (YHOO) in July 2012, she’s focused on acquisitions of small companies, with the exception of Tumblr Inc. for $1.1 billion last year. While the Sunnyvale, California-based Web portal gained engineering talent with the three dozen deals Mayer struck, that won’t be enough to keep revenue from falling again this year, according to analysts’ projections compiled by Bloomberg.

Yahoo’s stock has been buoyed by its about 24 percent stake in Alibaba, China’s biggest e-commerce company, which is preparing to go public. The chunk of Alibaba shares Yahoo plans to sell could at least double its $5 billion cash stockpile for buybacks and acquisitions, JMP Group Inc. said, giving the company firepower to restore growth faster. Yahoo also could go after mobile-applications and websites such as Pinterest, Snapchat or OpenTable Inc. (OPEN), SunTrust Banks Inc. said.

Yahoo! Inc. CEO Marissa Mayer
Chris Ratcliffe/Bloomberg
Since Marissa Mayer became chief executive officer of Yahoo! Inc. in July 2012, she’s focused on acquisitions of small companies, with the exception of Tumblr Inc. for $1.1 billion last year.

“They’ve been doing these tuck-in acquisitions, but on the table is something larger,” Robert Peck, a New York-based analyst at SunTrust, said in a phone interview. “Mayer wants to focus on mobile, video and even social, so anything that plays to those means would be interesting.”

Sarah Meron, a spokeswoman for Yahoo, declined to comment on the company’s plans for its cash or acquisitions it may make. Tiffany Fox, a spokeswoman for OpenTable, and Mithya Srinivasan, a spokeswoman for Pinterest, said the companies don’t comment on takeover speculation. Representatives for Snapchat didn’t respond to a request for comment.

Growth Potential

“We want to acquire companies that would have inherent growth themselves so that they are, what I call, growth accretive,” Ken Goldman, Yahoo’s chief financial officer, said at a Morgan Stanley conference March 4.

Yahoo’s revenue declined in four of the past five years, data compiled by Bloomberg show. The exception was 2012 when it increased by less than half a percent. Analysts estimate the company will generate $4.5 billion in sales in 2014, a 3.8 percent drop from last year, the data show.

Even so, the stock has surged almost 80 percent in the past 12 months as investors await the IPO of Alibaba, which has yet to price. Alibaba said in a statement this week that it has decided to start the process for a U.S. listing, which may be the biggest since Facebook Inc. in 2012.

Photographer: Brent Lewin/Bloomberg
Yahoo’s stock has been buoyed by its about 24 percent stake in Alibaba, China’s biggest e-commerce company, which is preparing to go public.

“There’s a fair amount of excitement over the windfall that’s going to land on Yahoo’s balance sheet,” Colin Gillis, a New York-based analyst at BGC Partners Inc., said in a phone interview. Exactly how much “comes down to what Alibaba prices at. But either way, it’s going to be a nice chunk of change.”

Alibaba Value

Last month, the average valuation forecast for Alibaba was $153 billion, based on 10 analysts’ estimates compiled by Bloomberg News. That implies almost $37 billion for Yahoo’s stake in the Hangzhou, China-based company. Yahoo’s own market value is about $40 billion.

Even if Alibaba commanded just $100 billion, Yahoo could sell a 10 percent position and still receive more than $6 billion in cash after taxes, according to Ronald Josey, a New York-based analyst at JMP Securities, a unit of JMP Group. That would leave Yahoo with at least $11 billion of cash.

“Alibaba is the spark,” Josey said in a phone interview. “The big debate right now is, post-Alibaba, what do they do with this cash and can the core business actually start growing again?”

While much of the Alibaba proceeds will probably be used to repurchase shares, there will still be plenty left over to continue making acquisitions, Peck of Suntrust said.

Expensive Targets

Yahoo could pursue a larger deal for a content provider such as Pinterest, which lets users bookmark images or recipes to share with their social network, or Snapchat, a photo-sharing app, he said. Another possibility is a website focused on local data such as OpenTable, the $2 billion online restaurant reservation service, according to Peck.

Valuations for Internet companies are high right now and many of them don’t yet generate sales, Gillis of BGC said. Yahoo is also competing against the likes of Facebook Inc. and others for those targets, he said.

Facebook announced last month that it’s buying WhatsApp Inc. for $19 billion, without disclosing whether the text-message service had any sales.

“My concern, if I were in Marissa Mayer’s shoes, is that with a significant acquisition you’re going to pay a big premium and you’re putting an awful lot of eggs into one basket,” James Cassel, chairman and co-founder of investment-banking firm Cassel Salpeter & Co. in Miami, said in a phone interview.

Pricey Purchase

Under Mayer’s watch, Yahoo bought Tumblr in May for $1.1 billion, which represented the richest valuation for a dot-com company since 2000, according to data compiled by Bloomberg on deals for which revenue figures were available.

Yahoo could instead look for targets that would bolster its revenue from advertising technology, Josey of JMP said. Yahoo’s share of the U.S. digital-ad market is projected to shrink to 5 percent in 2015 from 5.8 percent last year, while rivals Google Inc. and Facebook may expand their shares to 42 percent and 9 percent respectively, according to an EMarketer Inc. report published Dec. 19.

“Companies that have revenue are going to be less flashy,” Gillis at BCG said.

Mayer unveiled updated advertising services in January, including a service to help marketers more accurately target audiences and a new ad exchange, which gives companies more tools to manage promotions on their websites.

Yahoo’s “stock has done very well based on Alibaba, but really as far as Mayer’s regime, it will start to be gauged by the success” in turning around Yahoo and bringing back its growth, Peck said. “That’s really where her legacy will start.”

Older business owners holding on longer to their businesses, potentially facing increased risks

March 17, 2014

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By James S. Cassel
March 16, 2014

To sell or not to sell? That is the question weighing on the minds of many middle-market business owners as they approach what would have previously been their retirement years.

Years ago, when life expectancy was shorter, things were much simpler: When you reached your late 50s, you’d begin to think about selling your business and focusing on enjoying your golden years. But with many Americans now living well into their late 70s and 80s, it seems that a growing number hold onto their businesses longer, thinking they will need the income as well as the psychological stimulation as they age.

Making matters worse, the Great Recession of 2008 significantly hurt the retirement savings of many retirees, and left them without enough money to continue to sustain their lifestyles. While most have recovered the majority of their net worth by now, they still feel vulnerable. Although the solution might seem to be to continue holding onto the business for a few more years, there’s more to this equation than meets the eye, and holding on might pose more risks than rewards.

Most owners who sell their businesses will not be able to replace their business income through conservative investments. They believe their only option would be to keep their businesses as long as possible so they can continue to receive the profits and cash flow needed to maintain their lifestyles and maybe accumulate some wealth outside their businesses.

On another level, holding on is also an emotionally convenient decision to make. Many business owners consider their businesses an intrinsic part of their identities, and their desire to continue running their businesses extends well beyond sustaining their financial livelihoods. “I enjoy running my business, and working keeps me busy. I wouldn’t feel as fulfilled if I weren’t doing what I’ve been doing the past 20 years,” they worry.

The Guardian Life Small Business Research Institute reports in a study that although many business owners expect to live 20 years into retirement, less than half feel prepared enough for life after work. The trouble with this line of thinking is that it is driven by emotions and fear rather than by a pragmatic analysis of the numbers. Unfortunately for most business owners, there are some serious downsides to holding on too long.

Typically, for most business owners, the majority of their net worth is tied up in their businesses, so their assets are not properly diversified. They are tied, and fully committed in every sense, to their businesses. If bank loans come up for renewal, the owners generally still have to personally guarantee them, thereby prolonging their financial exposure.

Moreover, these aging business owners will continue to be exposed to all the usual risks of keeping up with new market entrants and competitive, innovative technologies that might cause them to lose market share, profits and value.

That said, it is critical to know when to consider selling. In my experience at Cassel Salpeter, I’ve seen many business owners turn down significant, fully valued offers. Years later, they regretted these decisions when circumstances required them to sell quickly due to major life events, and they no longer had the power of choosing the best deals or timing.

Or they were forced to sell when interest rates were higher or profit multiples in their industries were lower, and they could not get the maximum value for their businesses. I’ve seen many who had turned down strong offers to buy, only to be put out of business a few years later when new competitors entered the scene or the industry changed. If you owned a Blockbuster video franchise 10 years ago and held it until today, where would you be?

Determining when and how to sell your business is one of the most important strategic decisions you’ll make as a business owner. It is crucial to recognize when you should go to market and not just wait for unsolicited offers. Otherwise, you may end up having to sell your business at depressed values or on other people’s terms rather than your own terms. If you decide to wait, you should closely monitor the market and constantly evaluate your options.

It can be quite difficult to set aside the emotional considerations of parting with the “baby” that you have been nurturing for so many years and is such a large part of your business and personal lives. To help ensure that you make the most informed decisions and avoid the common pitfalls faced by many business owners, it is important to work with qualified, trusted advisers. who can help you take the steps that will have the most positive impact on both the company you are leaving behind and the years of life left ahead of you.

You can evaluate your options, which might include selling control to a family office or private equity firm so you can remain involved and get a second bite of the apple. Remember, the decisions you make now will have ramifications for generations to come. They should be made with cautious consideration of all of the facts and variables and should not be based on emotions or unrealistic expectations.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co. LLC. , an investment-banking firm with headquarters in Miami. that works with middle-market companies. www.casselsalpeter.com. He can be reached at jcassel@casselsalpeter.com