Starboard Pushes Yahoo (YHOO) For Major Overhaul

Shares of Yahoo! Inc. (YHOO) are down $0.28, or 0.67%, at $43.20 in early trading Monday after activist investor Starboard Value LP said in a letter to the Yahoo board that the web portal’s decision to spin off its stake in Alibaba Group Holdings Inc. (BABA) was a “good first step”. The firm insisted however, on other opportunities to create value for shareholders by cutting the company’s “bloated cost structure”, and exploring ways to monetize its intellectual property and real estate assets. Starboard also suggested Yahoo separate the Yahoo Japan stake in a tax-efficient way, and return $3.5 billion to $4.0 billion of excess cash to shareholders via share buybacks.

“In our view, Yahoo can resolve this obvious valuation discrepancy through changes that are within the control of the Company and the Board”, Starboard said in the letter. “We believe these changes…can unlock $11.1 billion of shareholder value or $11.70 per Yahoo share. This would imply an increase of 27% from Yahoo’s current stock price (assuming a constant Alibaba stock price) or equivalently, approximately a 100% increase in the value of the Yahoo Stub, which we consider a compelling investment, with limited downside risk, and with a clear path to value creation.”

“Yahoo’s current valuation discrepancy cannot be solved just with the Alibaba spin-off”, the privately owned hedge fund sponsor noted in the letter. “Yahoo is in need of a major overhaul”.

On valuation measures, Yahoo! Inc. shares are currently priced at 5.80x this year’s forecasted earnings compared to the industry’s 10.28x earnings multiple. Ticker has a PEG and forward P/E ratio of (4.58) and 46.99, respectively. Price/Sales for the same period is 8.81 while EPS is $7.45. Currently there are 21 analysts that rate YHOO a ‘Buy’, 13 rate it a ‘Hold’. No analyst rates it a ‘Sell’. YHOO has a median Wall Street price target of $59.00 with a high target of $69.00.

In the past 52 weeks, shares of the Sunnyvale, California-based company have traded between a low of $32.15 and a high of $52.62. Shares are up 9.53% year-over-year ; down 14.00% year-to-date.

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