States That the Tax-Free Spin-Off of Yahoo’s Alibaba Stake Is a Good First Step, But Not Enough to Solve Yahoo’s Current Valuation Discrepancy

Continues to Believe That There Are Other Opportunities Within the Company’s Control to Create Significant Value for Yahoo Shareholders

Believes That Implementing the Following Recommended Steps Can Unlock $11.1 Billion of Shareholder Value, or approximately $11.70 per Share

– Right-Sizing the Company’s Bloated Cost Structure

– Exploring Opportunities to Monetize Yahoo’s Intellectual Property and Real Estate Assets

– Separating Yahoo! Japan Stake in a Tax-Efficient Manner

– Returning $3.5-$4.0 Billion of Excess Cash to Shareholders through Share Repurchases

NEW YORK, March 9, 2015 /PRNewswire/ — Starboard Value LP (together with its affiliates, “Starboard”), a significant shareholder of Yahoo, today announced it has delivered a letter to Yahoo CEO Marissa Mayer and Yahoo’s Board of Directors.

The full text of the letter follows:

March 9, 2015

Marissa A. Mayer, President and CEO

Yahoo! Inc.

701 First Avenue

Sunnyvale, California 94089

cc: Board of Directors

Dear Marissa,

We are pleased that Yahoo! Inc. (“Yahoo” or the “Company”) has announced its intention to execute a tax-free spin-off of its stake in Alibaba.  We believe that the separation of this valuable asset is a good first step towards creating significant value for the benefit of all Yahoo shareholders.  However, we continue to believe that there are other opportunities to create value, highlighted in our previous letters and communications with you, which management and the Board of Directors (the “Board”) should also commit to execute.

Since Yahoo announced its intention to spin-off its stake in Alibaba, there has been substantial discussion and speculation in the investment community as to why Yahoo’s stock price reaction to the announcement was so muted and why the stock continues to trade at such a deep discount to the sum-of-its-parts valuation.  Based on our discussions with members of the investment community including shareholders, research analysts, and industry executives, we strongly believe this discount has little to do with the probable success of the Alibaba spin-off and instead is directly related to substantial skepticism about management’s and the Board’s willingness to take aggressive action to improve the Core Search and Display Advertising Business (“Core Business”), and unlock value from Yahoo’s remaining non-core assets.

Yahoo’s current valuation discrepancy cannot be solved just with the Alibaba spin-off.  Yahoo is in need of a major overhaul.  It is time for management and the Board to take a holistic view of the Company’s challenges and opportunities, and develop a comprehensive plan to maximize shareholder value.  In the paragraphs below, we have outlined our updated views on (i) the current and future potential value of Yahoo; (ii) the performance of the Core Business; (iii) intellectual property and real estate; (iv) the Yahoo! Japan stake; and (v) capital allocation.

The Current and Future Potential Value of Yahoo

We believe that Yahoo remains deeply undervalued and that the announcement of the spin-off of Yahoo’s stake in Alibaba into a new entity (“Spinco”) has made it an even more compelling investment opportunity.  The spin-off announcement has removed uncertainty on the path to realize the full value of Yahoo’s Alibaba stake, and, once completed, will result in increased transparency to shareholders regarding all of Yahoo’s remaining assets.  Based on our analysis, described in detail below, we believe Yahoo currently trades at a steep discount to the sum-of-its-parts valuation.

Applying a 7% discount to Yahoo’s Alibaba stake, which we believe is prudent based on our analysis of similarly structured holding companies that have traded over the last twenty years[1], Yahoo’s current share price implies that Yahoo pro-forma for the Alibaba stake spin-off (“Yahoo Stub”) is currently valued at approximately $11.2 billion – a discount of 50% to our estimate of fair value (described below) for this group of assets which is comprised of net cash, the Core Business, the Yahoo! Japan stake, intellectual property (“IP”), and real estate holdings.

Yahoo!’s Current Valuation $ in millions
Yahoo Current Market Capitalization, price as of 3/6/2015 close $    41,334
Less: Value of Alibaba Stake, price as of 3/6/2015 close (1)(2), discounted by 7% (30,110)
Current Yahoo Stub price  $  11,224
Yahoo Stub Value, Starboard Estimate 22,326
Current Discount to Yahoo Stub Value 50%
Notes:
(1) Spinco may initially have a higher discount than Yahoo! Japan because of the novelty of the 1940 Investment Companies Act legal structure
(2) For simplicity, assumes Spinco only asset is the Alibaba stake, and Yahoo Small Business is valued as part of the Core Business

In our view, Yahoo can resolve this obvious valuation discrepancy through changes that are within the control of the Company and the Board.  We believe these changes, outlined in this letter, 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! Value Creation Opportunity $ In millions unless otherwise stated
Value of Alibaba Stake, discounted by 7% $    30,110
   Core Business Bloomberg Consensus Adjusted EBITDA (1)(2) $         582
   Plus: cost cuts, midpoint of $330 – $570 million 450
   Pro-Forma Core Business EBITDA $      1,032
   Multiple           5.5x
Plus: Pro-Forma Core Business value $      5,676
Plus: Net value of IP and real estate value (3) 1,678
   Yahoo! Japan royalty and other revenues 253
   Multiple (Post Tax)           7.7x
   Value of Yahoo! Japan royalty and other revenues (4) $      1,948
   Yahoo! Japan 35.5% stake , pre-tax, and discounted by 5% 7,445
   Yahoo! Japan net Investment hedge 185
Plus: Yahoo! Japan stake, revenues, and net investment hedge $      9,578
Plus: Net cash (5) 5,394
Pro-Forma Value of Yahoo $  52,436
Current Yahoo Market Capitalization 41,334
Total Value Creation Opportunity $  11,101
Per Yahoo Share $11.67
Premium to Current Share Price 27%
Current Yahoo Stub price 11,224
Total Value Creation Opportunity $  11,101
Per Yahoo Share $11.67
Premium to Current Yahoo Stub price 99%
Notes:
(1) Assumes no cost cuts
(2) Derived from Bloomberg consensus EBITDA of $1.122bn less $253m Yahoo! Japan revenues (100% margin), $199m TIPLA amortization, and $88m other IP revenue amortization
(3) Net of capitalized rent expense and full taxation on gains of both real estate and IP. Assumes IP has zero tax basis.
(4) $94m of royalty capitalized at 17x and $159 million (ending in August 2017) capitalized at 2.2x, implied multiple 7.7x
(5) Assumes $3.3 billion in tax liability, convertible at face value (including equity component)

The Performance of the Core Business

Yahoo’s recent financial performance is unacceptable.  Over the last two and a half years, since the current management team was hired, Yahoo has spent approximately $4.8 billion in acquisitions and product development costs.  Despite these massive investments, Yahoo’s consolidated revenue and Adjusted EBITDA excluding Yahoo! Japan revenues and other non-cash revenues (“EBITDA”), declined by 3% and 27% in 2014, respectively.  Even more troubling, the Company’s first quarter 2015 guidance perpetuates a continuing pattern of declining profitability and lower margins.  It is also perplexing that just four months ago during the third quarter earnings call management affirmed that “EBITDA levels are at a low point and [the Company expects] to see improvements with revenue growth in 2015…” and, just a few months later, guided to a Q1 2015

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