The case for why Yahoo should buy eBay
In an open letter sent to Yahoo CEO Marissa Mayer on Thursday, Nelson laid out a 4-step plan that will let Yahoo monetize some of its Alibaba shares and use the proceeds to buy eBay, which he believes will help Yahoo double its intrinsic value by 2025.
The four-step process includes:
- Issue Class B shares of Yahoo for each share of Alibaba owned
- Place 20% of the newly-issued Class B shares at ~$60 each, and hold the remaining 80% in Treasury, issuing them over time
- That would give roughly $4.6 billion in proceeds, which would then be used to buy a company that has undervalued assets generating a ton of cash flow...like eBay
- Fuel the growth of eBay with its existing high-traffic properties like Tumblr and Flickr, creating an e-commerce giant that could leverage Yahoo's core properties
"We believe they will augment Yahoo's intrinsic value, position it favorably from a competitive standpoint, enhance its existing properties, while facilitating a growth engine for innovation," Nelson wrote in the letter.
When reached by phone, Nelson stressed that the letter was sent in the spirit of idea generation. Valuentum is an independent research firm, so it doesn't hold a stake in any company, nor does it have any future plans to own Yahoo shares. But at the same time, being in that neutral position and having an unbiased view is what makes his opinion legitimate, he said.
"We just wanted to offer up an alternative idea. This is something we're not sure many people thought about," he told us.
But Nelson may have a point. Since its spin off of PayPal, eBay has been trading at a relatively low price, he said, especially for a company that consistently generates $2 billion in free cash flow. Although there's a lot of things to work out, like tax issues, to make the deal really happen, Nelson believes it's the best long-term option Yahoo could pursue at this point.
"There is a very large potential for value creation on a long term basis," he said.
Yahoo made itself officially up for sale Wednesday, saying it's open to consider any "qualified strategic proposals." At the same time, the company is narrowing its focus, shutting down some of its old businesses and laying off 15% of its workforce this year.