Yahoo!’s Valuation – Goodwill leads to Goodwill

Posted on April 4, 2008

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Recent word is that Microsoft has no plans to raise its $44.6 billion bid for Yahoo! Inc. $44.6 billion got me wondering how this matched up to Yahoo’s value based on its balance sheet. I found one item to be particularly interesting – “goodwill” – which seems to be indicative of Yahoo! Inc.’s problems, and could be leading the company to Goodwill Industries very soon. How about a new logo?

As defined on Investopedia – “goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.” In other words, goodwill is the extra that you pay for after accounting for the actual company assets.

Keep in mind that I don’t know what the media industry norms are with regard to the goodwill-to-acquisition price ratios, but looking at the Yahoo! Inc.’s 2007 Annual Report, it seems to me that they’re pretty good at throwing cash into the goodwill bucket for acquisitions without getting much of a tangible return.

A few examples from Yahoo! Inc.’s 2007 10-K to illustrate (this info is found around page 70-85 of the report…):

1. Purchase of SOFTBANK, a firm with which Yahoo! had a couple of joint ventures (2005)

Total purchase price = $500 million in cash
Amount of purchase price allocated to Goodwill = $388 million

2. Purchase of Right Media (2007):

Price = $526 million ($246 in cash, $237 in equity)
Amount of purchase price allocated to Goodwill = $440 million

3. Purchase of Zimbra (2007):

Price = $302 million ($290 in cash)
Amount of purchase price allocated to Goodwill = $241 million

4. Purchase of Blue Lithium (2007):

Price = $255 million ($245 in cash)
Amount of purchase price allocated to Goodwill = $221 million

5. Alibaba (2005):

Price of 46% of shares = $1 billion in cash
Amount of purchase price allocated to Goodwill in 2007 = $443 million

Like I said, I don’t know what the normal allocation to goodwill as a percentage of total purchase prices in the media business, but when I look at these transactions, I see a significant trend –

Yahoo! likes to take cash from its pockets and exchange it for an accounting asset called “goodwill” that you can’t touch or see. These investments are not all-inclusive of all of the deals on Yahoo! Inc.’s books, but just up the cash spent on these five examples and you get nearly $2.3 billion.

I’d like to think that the brain trust at Yahoo! Inc. would like to have that $2.3 billion to spend on projects developed internally to produce organic company and product growth. Perhaps these actions are a microcosm of what’s happened to the Yahoo! brand. A company that led the Web 1.0 revolution is now becoming a sideline watcher in the Web 2.0 and Web 3.0 evolution.

To put some perspective Microsoft’s $44 billion offer – Yahoo! generated $6.9 billion in revenue in 2007, putting Microsoft’s offer at a bit more than 6x revenues. Compare that to Microsoft’s valuation of Facebook at $15 billion, estimated to be 500x revenues.

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