Question

Yahoo!, found in 1994, is a website company whose stock price had reached all time high of US$118.75 in 2000. However, after the dot-com bubble burst, it reached an all-time low of US$8.11 in 2001. In early 2012, the largest layoff in Yahoo!'s history was completed and 2,000 employees (14 percent of the workforce) lost their jobs. After turmoil of top management turnover, Yahoo hired Mayer as CEO. However, she failed to re-invent Yahoo as an independent company. In September 2014, Starboard (institutional investor) pushed Mayer to merge with AOL Inc. She didn’t oblige. The company reported a $4.36 billion annual loss for 2015. In February 2016, facing continued pressure, the company finally said it was considering a sale.

There were multiple interested buyers for Yahoo!, one of which is Verizon. Verizon bought AOL last year. The combination of AOL and Yahoo! can cut 1 billion in costs and achieve better technology integration. The takeover would double the size of Verizon’s digital ads, placing it as a distant third behind Google and Facebook.

Verizon is paying 4.8 billion all cash to purchase Yahoo’s core business, including internet operations like Yahoo mail and Yahoo finance. Real estate of Yahoo, and the newly bought social media website like tumblr. In a March 4 note, Cantor Fitzgerald analyst Youssef Squali estimated Yahoo’s core business, excluding the Asian assets and its cash, was worth around $4.3 billion.

Yahoo’s remaining shares held in Alibaba and Yahoo Japan, convertible notes, certain minority investment, and Yahoo’s patents are not included in this deal. Yahoo will hold on to these assets and form a new publicly traded investment company under a new name (Altaba Inc). Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017.

Mayer, Yahoo CEO since July 2012, is expected to receive a "golden parachute" payment that filings with the Securities and Exchange Commission say is worth more than $23 million.

(1) What do you think is the stock market reaction for Yahoo! after the deal is announced? Give at least two reasons to support your argument.

(2) What do you think are the main incentives for AOL to buy Yahoo!’s web business? Give three possible reasons.   

(3) How much is the premium paid? And what is the payment method?

(4) (3 points). What is golden parachute? Is it good or bad for corporate governance, and why?

(5) To finance the deal, if AOL uses its cash on hand, how does it change the debt/equity ratio of the AOL? What if AOL borrows term loans to finance the deal, how would it change the balance sheet of AOL (for the liability side)?

(6) If AOL uses its stock to pay Yahoo! And Yahoo! has a lower EPS than AOL, what would be the effect on AOL’s EPS? Is it dilutive or accretive?

Answer 1