Yahoo: waiting game

It's been three months since Yahoo announced it would split off its $32bn stake in Alibaba, handing it to shareholders in a tax-free spin-off. It is one of the grandest shareholder returns schemes of this decade. But now that the market has digested this, how does one value the remaining Yahoo business? What is left is an ageing advertising platform that has not seen revenue growth since 2008. Macquarie estimates the Yahoo Japan stake is worth $8.6bn (before tax). In other words, the market is still assigning a negative value to Yahoo's base business.

A key plank in CEO Marissa Mayer's plan for growth is to revive the fortunes of Yahoo's search business, which accounted for nearly half of the company's net revenues in the latest quarter. Toward this end, Yahoo has redone its search agreement with Microsoft to get more control over selling ads against its search. The terms of the new agreement are slightly more favourable to Yahoo, which will now receive 93 per cent of search revenues, up from 90 per cent previously. Yahoo has also seen traffic increase thanks to its recent partnership with the Mozilla browser: the number of paid search clicks rose by a fifth in the latest quarter.

Winning search will not be easy however, particularly given the strength of rivals Google and Microsoft, which control 55 per cent and 4 per cent of search advertising, respectively, according to eMarketer. Moreover on mobile advertising, where Yahoo has seen significant growth, advertisers such as Facebook, Twitter and Pandora still have a big lead.

If reviving Yahoo's search and advertising business proves too difficult, Ms Mayer still has a powerful arrow in her quiver: divesting Yahoo Japan. On Tuesday, she revealed that Yahoo had retained advisers to evaluate options for the unit. Yahoo may struggle to make a positive return on capital in the advertising business, but when it comes to returning value to shareholders, intriguing possibilities remain.

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