Why Yahoo Should Sell Its Core Business

Wall Street is a funny place. When the Journal broke the story that Yahoo’s board would consider selling its core business, that sparked a media frenzy that sent the stock soaring nearly 6%. In other words, the company is worth less with its Internet advertising business than without it.

Which begs the question, how can a cash-flow positive revenue stream of $4 billion a year be worth less than zero? When the Street has zero confidence in the management team’s ability to do anything but manage its slow and steady decline. And that’s apparently how investors feel about Yahoo CEO Marissa Mayer.

A more important question is, how credible is the possibility that the board may actually give up on Mayer’s three-year plight to turn Yahoo (NASDAQ:YHOO) around and unload its core advertising business? The answer is, nobody knows, including the board. At this point, it’s all just speculation by a click-hungry media and investors out to make a buck.

Don’t get me wrong. Yahoo’s directors do have some very important decisions to make during their annual strategy meetings that began on Wednesday and are slated to conclude tomorrow. At the top of the agenda is undoubtedly whether to go through with a planned spin-off of the company’s $32 billion stake in Alibaba (NYSE:BABA) early next year.

But the efficacy of that plan was called into question two weeks ago, when activist investor Starboard Value LP sent a letter to Mayer and chairman Maynard Webb calling for Yahoo to reverse course, keep its stake in the Chinese e-commerce giant, and instead explore a sale of its core search and display advertising businesses.

Funny thing is, it wasn’t too long ago that Starboard advocated for the Alibaba spin-off as a viable option to unlock shareholder value, but that was predicated on the transaction being tax-free. Unfortunately, the feds have decided not to rule in advance, meaning Yahoo’s shareholders – including Starboard – could get stuck with a massive tax liability.

Rather than take the risk, Starboard is now advocating for Yahoo to become an investment holding company whose combined assets – a 35% ownership in Yahoo Japan and 15% stake in Alibaba Group – would be worth about $40 billion. If Yahoo were to get, say $3 billion for its core business, that adds up to $43 billion – a $10 billion step up in basis from its current market cap of $33 billion. Not a bad payday for shareholders.

At least, that’s the sort of math hedge funds like Starboard tend to do. In this case, the numbers do work and Yahoo’s board may very well opt for the low-risk approach and avoid the possibility of massive shareholder suits. Besides, there’s still considerable value in Yahoo’s core businesses – a lot more than zero, that’s for sure.

Its sites – including Yahoo’s News, Finance and Home pages – still get over 200 million visitors a month – more than any other U.S. company except Google and Facebook (NASDAQ:FB). And Mayer’s focus on fast growing initiatives she calls Mavens – mobile, video, native and social advertising – would certainly be valuable assets in the right hands.

As for which hands might be the right hands, there’s no shortage of possibilities. I’m sure some private equity firms like TPG Capital or Silver Lake Partners would consider taking the company private, selling off its legacy units and repositioning the Mavens as a high-growth Internet play. And there’s also the usual laundry list of public companies being tossed around by the media.

But here’s the rub. The biggest question of all, which nobody knows the answer to, is whether Mayer is ready to throw in the towel yet. Remember, this is the hotshot former Googler who came to Yahoo with great media fanfare, a hefty pay-package and a mandate to revitalize the chronically ailing and rapidly aging Internet has-been.

That was just over three years ago – three long years of what to many, including me, has seemed like Mayer throwing massive amounts of spaghetti at Yahoo’s purple walls to see what sticks. We’re talking dozens of acquisitions, executive hires, and internal projects. But aside from the future promise of the Mavens, nothing has really stuck.

And while the media speculates that her days may be numbered, Re/code’s always wise and well-informed Kara Swisher wrote yesterday that “reports of the impending demise of CEO Marissa Mayer at Yahoo are greatly exaggerated” and the board still has Mayer’s back. Which is not surprising since she chose many of them, as Swisher points out.

Thinking back to when Yahoo announced that its incoming chief would be none other than the tech industry’s most glamorous geek, I pondered whether Mayer’s glitzy image would turn out to be more sizzle than substance. I wondered whether she had the experience and maturity to turn around a perpetual train wreck like Yahoo.

But eight months later, I’d seen enough, and declared Mayer’s Yahoo to be Alibaba, smoke and mirrors. Not much has changed. I’m not saying she hasn’t given it her all, but in the hyper-competitive and fast-changing tech world, that’s not nearly enough.

Running a public company is hard. Turnarounds are even harder. And after who knows how many CEOs have tried, Yahoo has proven to be one of the most challenging of all.

Taking Yahoo’s core business private or selling it to a public company may very well be the right move for shareholders, a lower risk bet for the board of directors and an honorable way for Mayer to exit.