Frustration with Yahoo’s feckless board went into overdrive recently when the board began soliciting ideas, proposals, and offers from anyone who had them.
The whole process seemed designed to avoid solving Yahoo’s fundamental problems and instead come up with a transaction–any transaction–to save face before the board rinsed their hands of the whole affair.
And the frustration only grew with the report a few days ago that the board was “leaning toward” a seemingly bizarre proposal from private-equity firm Silver Lake that would involve issuing new stock at the current (demolished) share price and then basically returning control of the company to founder and former CEO Jerry Yang.
Taking the Silver Lake deal seemed outrageous for two reasons:
Yahoo doesn’t need cash, so the issuance of new stock (and the dilution of current shareholders) seemed absurd. What Yahoo needs is great leadership, not financial engineering.
Jerry Yang is a great guy, but he has already had his crack at running the company, and it went badly.
But now, after talking to people familiar with the details of the Silver Lake proposal and Yahoo’s other options, I understand the situation better. And the Silver Lake plan actually appears to be the best option Yahoo has. (Details below).
For one thing, Yahoo’s other options aren’t exactly appealing. They appear to be threefold:
Yahoo’s other “bid” is reportedly a similar offer from private-equity firm TPG at a slightly higher stock price–a proposal that would not include the support of Andreessen Horowitz and Marc Andreessen, which is a major benefit of the Silver Lake plan. The details of TPG’s bid have not been reported (which itself is revealing). The firm is reportedly scrambling to enlist the help of another Valley kingmaker, Greylock’s Reid Hoffman, to sweeten its offer, but Reid does not appear to be exactly jumping up and down about the idea.
China eCommerce giant Alibaba, who wants Yahoo’s Asian assets, is rumored to be “preparing” a bid for the whole company at ~$20 a share, with the help of private-equity firms Blackstone and Bain. This sounds simple, but it also seems highly unlikely to actually be a good option. For one thing, Alibaba has now had months to “prepare” this bid and it hasn’t made it yet. This suggests that the bid may never actually materialize. (Raising ~$25 billion of cash in today’s economy would be no mean feat.) And even if the cash can be raised, it’s not clear that the deal would or could actually ever get done. We’re heading into an election year, and China fears and resentment are already running high. The idea that regulators would just rubber-stamp the sale of a major American corporation to a Chinese rival seems like wishful thinking, which means that the deal would likely be tied up forever. And, in the meantime, Yahoo’s core business would likely disintegrate.
More of the status quo. Yahoo’s board has given up, the company is in purgatory, and the competitive position of the core business grows weaker by the day. The idea of doing “more of the same” at this point, therefore, is highly unappealing.
So that leaves the Silver Lake proposal, which actually has a lot to be said for it, especially relative to the alternatives.
The Silver Lake deal, it turns out, is NOT a clever way for Jerry Yang to retake control of the company. In fact, although Jerry would remain a shareholder and board member, his control and influence would be diminished. The current board–the root of Yahoo’s problem–would basically get canned. And the dilution caused by the issuance of new stock at the current stock price would be offset by a dividend or buyback program, so the transaction would not be such a punch in the face to current shareholders.
According to a person familiar with the details. there are six parts to the Silver Lake proposal:
- A “PIPE” (private investment in public equity) transaction that would include Silver Lake and Andreessen Horowitz buying $3 billion of newly issued preferred stock in Yahoo at $16.60 a share and then raising an additional ~$3 billion in debt financing from banks and Microsoft. The cash injection, in other words, would total about $6 billion.
- The distribution of some or all of this cash to current Yahoo shareholders in the form of a dividend or a stock buyback. The latter would offset the dilution from the preferred stock issuance.
- A plan for Yahoo’s Asian assets that would allow the company to “unlock” their value. This plan would involve the cooperation of Alibaba, which Silver Lake has invested in and has been working with for months.
- A plan for recruiting the right CEO to fix Yahoo’s core business. A specific CEO has not been tapped, but Silver Lake presumably has some names in mind. The new CEO would not be either Marc Andreessen or former OpenTable CEO Jeff Jordan. Neither of these two would take any operating or executive role at the company.
- A completely restructured board of directors. This is the key. As part of the proposal, Silver Lake would appoint three new board members, one of which would be Marc Andreessen. The new board would also include 5-6 independent directors, which might or might not include some current board members. (The details by which these board members would be selected and approved are not yet clear. Presumably they would be mutually-agreed upon by the current board and Silver Lake.) Yahoo founder and former CEO Jerry Yang would stay on the board, with Silver Lake’s blessing, but he would not control it.
- A general strategic plan to fix Yahoo’s core business. This plan does not call for a radical transformation of the company. Rather, it involves focusing the business, streamlining decision-making, and generally just helping the company execute better. The details of this plan would obviously be worked out with the company’s new CEO.
Now, the idea that Yahoo would issue $3 billion of new preferred stock at $16.60 a share when it doesn’t know what to do with the cash it already has is, understandably, deeply unappealing. A more palatable alternative would be to have Silver Lake buy $3 billion of common stock in the open market and accumulate its 20% stake that way.
But Silver Lake’s not about to do that.
Preferred stock has a major advantage over common stock in a situation like this, which is that its downside risk is limited. If Yahoo ever gets liquidated, Silver Lake will get all its money back before common stockholders see a penny.