Large Yahoo (YHOO) Shareholder Seeks To Revive Microsoft (MSFT) Talks

Ivory Investment Management LP, one of Yahoo's largest stockholders with 21.4 million, or 1.5% of the shares outstanding, proposed in a letter to Yahoo's (Nasdaq: YHOO) Board that the company salvage a deal with Microsoft "and not miss another value maximization opportunity."

Ivory proposed that the company sell its search business to Microsoft (Nasdaq: MSFT), with Microsoft becoming the search provider for all Yahoo properties. Under the Ivory proposal, Microsoft would own and operate the combined search platform, with Yahoo becoming an affiliate that retains 80% of the revenue generated through searches on its own site. Finally, Microsoft would become the search engine for Yahoo's existing search affiliates.

Hedge fund, Ivory Investment Management, says a search deal with Microsoft could deliver value to Yahoo shareholders of $24-29 per share, or more than double yesterday's closing price of $12.19." Ivory said Yahoo could "receive more than $15 billion upfront from Microsoft for its search business and increase EBITDA by more than $500 million per annum."

"On an after-tax basis, the $15 billion payment from Microsoft would be $9 billion for Yahoo shareholders, leaving Yahoo with $21.2 billion of cash and investments (up from $12.2 billion today) and annual EBITDA of $2.4 billion. Applying a 5x EBITDA multiple on the "new Yahoo" would result in a value of $24 per share.

Noting that Yahoo and Microsoft each may be spending well over $1 billion a year on their respective search businesses, Ivory said that combining the two could save $800 million in duplicate operating costs. In addition, due to the increased economies of scale in the search business, Ivory believes that the combination could increase total search revenues by at least 20% or $500 million per year.

Ivory did say that both companies must act now in an effort to stem the loss of market share to Google (Nasdaq: GOOG).

"This deal would offer Microsoft the unique opportunity to immediately gain critical mass to better level the playing field with Google, while it would simultaneously allow Yahoo to both receive a sizable upfront cash payment and increase its prospective cash flow," Ivory said.

Ivory Investment Management, L.P. is a research-intensive, fundamental value-based investment firm founded in 1998.

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