Common Yahoo M&A gossip lacks context

Contact: Scott Denne

There’s no shortage of breathless ideas floating around about what Yahoo should do with its new-found Alibaba cash. The two most commonly touted are a $4bn purchase of AOL – an idea that now has the backing of an activist hedge fund – and buying Yelp (current market cap $5bn). While not impossible, there’s a common thread in both these ideas: they ignore Yahoo’s stated growth strategy and its past behavior.

Yes, Yahoo now has about $5-6bn in additional cash (half of which it said will be returned to shareholders), but it wasn’t strapped for capital before this. Over the last two years, its stock price rose 2.5x, giving it a $40bn market cap to spend with, and it ended last quarter with $2.7bn in cash. So, it has plenty of currency to make a big purchase, but hasn’t. In fact, CEO Marissa Mayer has only one major purchase in her tenure: the $1.1bn purchase of social media company Tumblr. Aside from that deal, the company hasn’t spent more than $500m on a deal since 2007, when it bought Right Media.

Under Mayer, Yahoo’s clear focus has been on expanding video and editorial content while transitioning to a mobile-first company, and the deals it has done this year reflect that. According to the 451 M&A KnowledgeBase, Yahoo bought nine, mostly mobile, companies in the first half of this year. And for that, it laid out an inconsequential $21m of its cash, according to its most recent quarterly report. Making one of the biggest deals in its history – to pair up with a company such as AOL or Yelp that is rooted in Web content and display advertising – would be an about-face.