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Plenty of Synergies, Benefits to be had in Yahoo!/AOL Deal - Cowen (YHOO) (AOL)

September 29, 2014 9:23 AM EDT
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Price: $52.58 --0%

Rating Summary:
    18 Buy, 21 Hold, 5 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
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Cowen and Company issues commentary on Yahoo! (Nasdaq: YHOO) following release of a letter last Friday by Starboard suggesting the company should explore alternatives, including a potential tie-up with APL (NYSE: AOL).

Analyst John Blackledge commented that potential synergies between the two companies include:

i) cross promotion of various internet platforms;

ii) costs reductions – a) Sales, YHOO had ~$900MM sales costs in 2013 (90% of S&M line item), b) Headcount – combined companies have ~17K employees (~12.2K YHOO / 4.6K AOL), c) Facilities;

iii) Ad tech platform – AOL’s ad tech stack is more complete than YHOO’s in our view, given AOL’s organic investment and acquisitions (Adapt.tv), as AOL’s ad tech business is pacing for ~$1BN in revenue (low EBITDA margin); and

iv) Platform synergies – AOL’ strength is news (HuffPo) and tech (Techcrunch, Engadget), YHOO is formidable in Sports (particularly Fantasy, which is profitable) and has a much larger overall user base.

Other key points:

Tax Efficient Monetization of Remaining BABA Stake Post IPO

"Post offering, YHOO has~15% stake remaining in BABA, valued at $34.6BN. YHOO has been searching for ways to tax efficiently sell its shares in BABA post lockup (roughly a year from now). We think one of the elements of what Starboard is proposing is the idea of a cash-rich split where AOL is the surviving entity. If so, it would potentially be allowed to divest the remaining stake on a more tax-efficient basis."

Near-term Impact on the Stocks

"AOL shares should benefit from the speculation essentially providing downside protection for the time being (5.3x ’15E EV/EBITDA) while YHOO should also benefit near-term from the speculation. Starboard knows AOL intimately, as the firm recommended changes several years ago during the initial stages of the Tim Armstrong regime. Many of those changes were already in the process of being adopted by the company, but ultimately these changes (costs cuts, divestitures, etc) were realized."

Cowen has Yahoo! at Market Perform with a price target of $32. AOL is rated at Outperform with a $49 price target.

For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.

Yahoo! closed at $40.66 yesterday.



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