Posted by: Kenji Hall on July 22, 2008
Now that Yahoo has made investor Carl Icahn a member of its board, what will happen to Yahoo’s operations in Asia? The company told shareholders, in a July 17 letter, that it is considering “a potential spin-off of our Asia assets and a return of cash to stockholders.” That could mean dumping sizable equity investments, including Yahoo Japan, Softbank Capital and China’s Alibaba, which runs an online marketplace for businesses and oversees Yahoo’s China-based operations. At the end of 2007, Yahoo owned just over a third of Yahoo Japan, 43% of Alibaba Group and 5% of Softbank Capital. Some analysts estimate that Yahoo’s stakes in China and Japan are worth more than a third of the company’s share price.
Is an asset-lite approach in Asia wise for Yahoo? It really depends on whom you ask. Icahn has given Yahoo a to-do list that, he says, would make shareholders happier. He’s in favor of a sale that would likely generate extra cash, which can be passed on to investors in the form of dividends or share buybacks. Yahoo’s stake in Yahoo Japan alone is worth more than $7.2 billion. There’s also Yahoo’s 10% of Alibaba.com, which the Alibaba Group took public last fall. In the first quarter, Yahoo reported a net non-cash gain of $401 million from the IPO.
But jettisoning its holdings in the region might be a setback for the brand. Sure, Yahoo isn’t the top-ranked search site in every country in Asia. It trails Google and Baidu in China, and it’s a minnow in Korea, where Naver, Daum and Nate dominate. But in Japan, Yahoo draws more traffic than any over site. And in May, it was number one overall in the Asia-Pacific region, according to comScore’s figures. (Here’s the breakdown in Japan: Yahoo Japan had 46.1 million unique visitors in June, ahead of Google’s 35.8 million and online shopping site Rakuten’s 30.8 million in June. In the Asia-Pacific region in May, Yahoo had 215 million, vs. 204 million for Google and 188 million for Microsoft.)
And while its lead in Japan has narrowed a bit lately, Yahoo could be in for a second wind, after Japanese Internet powerhouse and mobile carrier Softbank began selling Apple’s iPhone 3G this month. Odds are, iPhone owners will go straight to the Yahoo Japan site when they access the Internet. That’s because Softbank owns a majority stake in Yahoo Japan, and every iPhone it sells comes with a pre-installed Yahoo icon on the main menu. (The carrier’s 19 million mobile subscribers also carry around handsets equipped with a Yahoo button.)
Yahoo’s properties in Asia—-one of the world’s fastest-growing market of Net users—-help reinforce the company’s brand globally. They also offer the company a valuable resource for testing new mobile services, which analysts expect to be the next major battlefront for tech companies.
In Japan, the company can tap into some of the most sophisticated cellphone users on the planet. Rival Google gets a lot of mileage out of trying out new online products and services in Japan that its software engineers in Tokyo and other parts of the world have dreamt up. One example: A few months ago, Google began offering mobile users access to their personal calendars but pulled the plug on it after a couple of weeks because the product flopped in usability studies.
Of course, almost nobody thinks Yahoo would consider focusing only on the U.S. market. After all, Yahoo’s international businesses accounted for 45% of the company’s global operating income last year, and about a third of operating cash flow. The company’s gross profit margins are also higher overseas, ranging between 26% and 30%, compared to 9% to 16% in the U.S. And not having an equity stake shouldn’t prevent it from providing its search and ads-placement technologies to partners. I'd be interested in hearing Icahn's rationale for Yahoo to shed these kinds of strategically important assets.