Yahoo chief’s grip is slipping

October 14, 2010

Yahoo chief executive Carol Bartz’s grip is slipping. With few signs that her plan to return its core Internet business to relevancy is working, investors are restless. They’ve become increasingly focused on the company’s valuable Asian holdings, which Bartz has failed to monetize — or even make a persuasive case for keeping. A big value gap and growing impatience mean outsiders may do the job for her.

It was clear when Bartz joined Yahoo in January 2009 that she needed to address the company’s Asian assets, in which the company has little or no control. It was also clear that Yahoo’s Internet business was in danger of becoming an also-ran. Nearly two years down the road, Bartz has yet to answer these challenges. That’s why AOL  and private equity firms may be sniffing around its purple-chaired headquarters.

Unwinding Yahoo’s stake in China’s Alibaba makes sense. The private company, which owns China’s versions of eBay and PayPal, doesn’t really fit with the U.S. Internet group. Alibaba’s executives are displeased with the relationship. And Alibaba has said it is interested in buying back the stake, but has no plans for an initial public offering. So the ball is in Yahoo’s court. Bartz’s reluctance to move is hard to fathom.

That’s a mistake. Analysts value the 40 percent in Alibaba at $7.5 billion — about the same as its stake in Yahoo Japan. If the company can find a way to sell these stakes to minimize tax leakage — and Alibaba , for its part, has hinted it has a way — that would unlock a big chunk of value for Yahoo’s long-suffering shareholders.

Instead, it appears that Bartz has focused more of her attention on fixing Yahoo’s core display advertising business. But as the dwindling fortunes of AOL or Barry Diller’s IAC  have shown, it’s difficult to turn around a fading Internet operation. Revenue growth in the second quarter was largely stagnant while rivals reported growing Internet advertising sales. The truth is, Bartz still hasn’t defined Yahoo’s mission any more clearly than her predecessor and company founder Jerry Yang did.

If the Asian operations are worth $15 billion that implies investors are valuing Yahoo’s core at less than $4 billion after adjusting for cash, or just five times estimated 2010 operating profit. Google’s trades at 13 times. Even with the prospect of having to pay taxes on any divestitures, the discount may be sufficient to tempt an outsider to try and accomplish the mission Bartz failed even to begin.

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