Thursday, April 3, 2008

Yahoo!'s Valuation - Goodwill leads to Goodwill

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.



Will said...

Ur an idiot...learn some accounting before you talk...

Coca-Cola -
Market Value $136 Billion
Book Value $23 Billion

Microsoft -
Market Value $272.32 Billion
Book Value $37 Billion

Market Value $182 Billion
Book Value $22 Billion

Market Value $40 Billion
Book Value $9.5 Billion

Now...when a company purchases another company it typically will offer more than the current market value - which is kinda obvious considering shareholders are the voters. So when Yahoo purchases another company it will obviously have a large amount of "goodwill", which represents this accounting term. It represents the value of a 'brand', future earnings, or other valuable information that is not tangible. Companies such as Google, Microsoft, Yahoo, and Coca-Cola hold the rights to trademarks, patents, and worldwide brand recognition. Just because you cannot represent this item does not mean that it is not important. Yahoo acquired 40% of Alibaba for a billion dollars...But Alibaba is eBays worst nightmare in China...

Go and read up on accounting (US Generally Accepted Accounting Principles...

You have a good research idea just need to be more knowledgeable when you are talking about it. Get some solid data - compare it to other companies...the S&P 500 and other search engine companies.

Scott Sambucci said...

Hi Will -

Starting a comment with "Ur an idiot" isn't exactly the most productive way to make a point.

To address you're comment in a sophisticated manner, I'm well aware of the concepts of accounting, and more specifically, the concept of goodwill.

Goodwill is an arbitrary value that is assigned and justified by the acquiring and acquisition. The acquisition often times is the cash beneficiary of the transaction, while the acquiring firm is left with an intangible asset such as a patent, license, and brand name.

In the article, you'll notice that I never stated that these items were unimportant. The article was focused on the fact that Yahoo! exchanged cash for a series of intangible assets that may or may not yield future benefits by way of market share and shareholder equity. In the technology sector, with fast innovation and development, products that appear to have great value today may lose their value tomorrow if a new technology leapfrogs it.

In Yahoo's case, in my opinion, they exchanged large amounts of cash for assets composed mostly of goodwill that may or may not have value. It seems that another approach that they could have taken would have been to use the cash they had on hand to develop new products organically.

Finally, I appreciate the time that you've taken to comment to the blog. I invite you to comment any time, though I would prefer that you take a more professional approach. Whether you take that approach is up to you.