Term Sheet — Wednesday, February 24

February 24, 2016, 3:04 PM UTC

Giving Odds On Who Will Buy Yahoo

Yahoo Inc. is on the block. Again.

The last time we went through this was in 2011, when several private equity firms kicked the tires pretty hard, but ultimately bounced off. This time the Yahoo board seems more serious, however, last week announcing the creation of an independent committee to explore strategic alternatives. So let's lay some odds on the reported suitors, for a takeover that sources believe could be worth anywhere from $3.5 billion to $6.5 billion:

Verizon Communications (2:1)

"This is Verizon's deal to lose," says a longtime tech banker who believes that Yahoo will ultimately "go to the highest bidder."

For starters, Verizon can afford to be that bidder. It has a market cap of $208 billion, and nearly $5 billion of cash on its balance sheet. Second, CEO Lowell McAdam has been unusually public about his interest in buying Yahoo, perhaps in an effort to discourage other bidders. Third, Verizon actually has someone already in place to run the show, in the form of AOL CEO Tim Armstrong. It might be a bit personally complicated for Armstrong to dethrone his old Google colleague Marissa Mayer, but integrating Yahoo's giant audience and content with AOL could boost Verizon's competitive position in vital areas like mobile video.

The only hangup here could be pressure from Verizon shareholders, who may not be so sure that buying yet another first-generation web portal is really a step toward the future. Plus there's a big wireless spectrum auction coming up, and those megahertz won't come cheap. That's why Verizon will really want to keep the price low, even though it technically could afford to pay up.

Time Inc. (8:1)

At first blush, this doesn't seem to make much sense. After all, Time Inc., Fortune's publisher and my employer, has a market cap of just $1.5 billion and only $651 million in cash. But smaller companies can effectively acquire larger ones via something called a Reverse Morris Trust. Here's how it would basically work:

  • Yahoo Inc. would create a subsidiary to hold core Yahoo.
  • That subsidiary would then merge with Time Inc. to create a new company. Let's call it TimeHoo.
  • TimeHoo would issue enough shares to Yahoo Inc. shareholders that it would give them both economic and voting control of TimeHoo.

Because of the Reverse Morris Trust rules, neither Yahoo Inc. nor its shareholders would be taxed on this new distribution, so long as Time Inc. can convince regulators that this transaction was not part of a longer-term plan that kicked off when the company was spun out of Time Warner back in June 2014. This tax strategy could theoretically give Time Inc. some pricing advantage in a competitive auction process.

Mathew Ingram has more on the strategic rationale here, which is a bit reminiscent of the rationale behind Time Warner's ill-fated merger with AOL in 2000. Basically, Time Inc. would feed its premium content into Yahoo's massive audience, thus serving higher-priced ads to more people. It's basically the third leg of a stool that Time Inc. began building earlier this month by purchasing programmatic ad platform Viant. Well, perhaps a lopsided stool, as Viant was valued at a deep discount to the $300 million pre-money valuation its predecessor entity received from private equity back in 2011.

Time Inc., via a spokesman, declined comment.

Private Equity (10:1)

Around a dozen private equity firms are tentatively circling Yahoo right now, and ringing up various outside executives to see if they would have interest in serving as post-acquisition CEO. In fact, multiple sources say that current Yahoo CEO Marissa Mayer also has reached out to private equity firms ― via banker Frank Quattrone ― about possibly fronting an offer of her own.

Back in 2011, interested private equity firms were primarily interested in Yahoo's Asia assets, which wouldn't be in play this time around. Silver Lake (working with Microsoft and Andreessen Horowitz) and TPG Capital (working with Greylock Partners) each had a pretty similar plan:

  1. Sell/spin off the Asia assets.
  2. Use the proceeds to buy major Web 2.0 properties.
  3. Cut costs.

Another 2011 offer from Bain Capital and The Blackstone Group focused mostly on the third part of that, because it was coming in partnership with Alibaba and Yahoo Japan co-owner Softbank.

Even though a 2016 private equity bid wouldn't include the Asia assets, it also would be designed around a similar thesis. For example, firms could pay six times EBITDA (i.e., $4.5 billion) with plans to cut costs down to three times EBITDA. Most large buyout shops ― with the notable exception of Silver Lake ― have expressed at least mild interest.

To afford a deal, however, all but one or two interested private equity firms would need to either club up with one another, or secure very large equity co-investments from their limited partners.

Other (12:1)

This is where I basically give myself some cover, by pointing out that Verizon and Time Inc. aren't the only strategic buyers that could take a run at Yahoo. Many of the same strategic reasons the deal makes sense for Verizon also apply to AT&T (ATT) and Comcast (CMST). Some of the Time Inc. thinking could also apply to a media company like Germany's Axel Springer. And then there is the wildcard of Alibaba, which might try to buy core Yahoo as a way to get back the Alibaba stock held by non-core Yahoo. Plus Softbank.


There is, of course, the very real option that Yahoo won't be acquired by anyone. Again.

Perhaps Verizon's top shareholders make too much noise. Maybe Time Inc. decides that finding audience isn't its greatest challenge. Perhaps private equity firms can't find debt financing in what has become a very tight credit market.

Or maybe bids do come through, but Yahoo's board thinks shareholders would be better served by remaining independent. There is a case to be made that if Yahoo's board really wanted to sell, it would have fired Mayer and promoted CFO Ken Goldman on an interim basis. Like all things with the Internet icon, this outcome isn't obvious.


 Fortune's Shawn Tully has discovered that regulatory concerns may not be the only reason that United Technologies (NYSE: UTX) rejected a $90 billion takeover offer from Honeywell International (NYSE: HON):

"According to a source familiar with United Technologies’ thinking, the Honeywell offer stipulates that its CEO, Dave Cote, would run the combined aerospace and building supplies conglomerate, and grant United Technologies’ current CEO Greg Hayes no role in the new company." Read more.


 Forty Seven Inc., a Palo Alto, Calif.-based immuno-oncology startup, has raised $75 million in Series A funding. Lightspeed Venture Partners and Sutter Hill Ventures co-led the round, and were joined by Clarus Ventures and Google Ventures. The company also said that it has licensed the rights to multiple immuno-oncology programs from Stanford University. www.fortyseveninc.com

 Pronutria Biosciences Inc., a Cambridge, Mass.-based developer of therapeutics to mediate amino acid biology, has raised $42.5 million in funding from Nestlé Health Science. Last May, the company raised $39 million in Series C funding from Fidelity and Flagship Ventures. www.pronutriabio.com

 Quantified, a Menlo Park, Calif.-based on-demand insights platform for brands, has raised $30 million in new VC funding. Cathay Innovation led the round, and was joined by return backers Redpoint Ventures, U.S. Venture Partners, Comcast Ventures, Iris Capital and AME Cloud Ventures. Read more.

 Deliv, a Menlo Park, Calif.-based crowdsourced same-day delivery startup, has raised $28 million in new VC funding. Backers include UPS Strategic Enterprise Fund, Upfront Ventures, RPM Ventures, PivotNorth Capital, General Growth Properties, The Macerich Company, Simon Venture Group, Taubman Centers Inc. and Westfield Corp. www.deliv.co

 PolyPid Ltd., an Israel-based developer of post-surgical anti-infection drugs, has raised $22 million in new VC funding. Shavit Capital and return backer Aurum Ventures co-led the round. www.polypid.com

 RealtyShares, a San Francisco-based online marketplace for real estate investing has raised $20 million in Series B funding. Union Square Ventures led the round, and was joined by return backers Menlo Ventures and General Catalyst Partners. www.realtyshares.com

 NICO Corp., an Indianapolis-based maker of neurosurgery medical devices, has raised $15 million in new VC funding from existing backers River Cities Capital Funds and Rose-Hulman Institute of Technology. www.niconeuro.com

 NoBroker, an India-based P2P property rental site, has raised $10 million in Series B funding. Beenext and Digital Garage co-led the round, and were joined by Qualgro, Asuka Holdings and return backer SAIF Partners. Read more.

 TodayTix, a New York-based provider of on-demand access to last-minute theater tickets, has raised $9 million in Series B funding co-led by Walden Venture Capital and TYLT Ventures. www.todaytix.com

 Real, a tech-enabled real estate brokerage, has raised $6 million in Series A funding led by Magma Venture Partners. www.joinreal.com

 ReSec Technologies, a New York-based developer of cyber protection technology has raised $5 million in Series A funding co-led by PICO Venture Partners and Founders Group. www.recsec.co

 ClearMetal, a San Francisco-based predictive logistics startup, has raised $3 million in seed funding from NEA, Skyview and Innovation Endeavors. www.clearmetal.com

 BetterView, a San Francisco-based provider of aerial and drone imagery solutions for businesses, has raised $1.55 million in funding from Arena Ventures, Metamorphic Ventures, 500 Startups, Haystack, MetaProp NYC and Router Ventures. www.better.vu


 Cadence Education Inc., a Scottsdale, Ariz.-based portfolio company of Audax Group, has acquired Next Generation Children’s Centers, a provider of early education and childcare services in Massachusetts. No financial terms were disclosed. www.ngccenters.com

 Centerbridge Partners has agreed to acquire Prestone Products, a Lake Forrest, Ill.-based maker of performance chemicals for vehicles, from New Zealand billionaire Graeme Hart for $230 million. Read more.

 The Hilb Group, a Richmond, Va.-based portfolio company of ABRY Partners, has acquired PriMed Consulting, an Ocean Township, N.J.-based provider of medical malpractice insurance. No financial terms were disclosed. www.hilbgroup.com

 RimRock Oil & Gas has been launched via a $500 million line-of-equity investment from Warburg Pincus. RimRock plans to focus on acquiring and developing unconventional oil and gas assets in the U.S. and Canada. www.rimrockoil.com

 Stirling Square Capital Partners has acquired Mettis, a UK-based maker of aerospace components, from Chamonix Private Equity. No financial terms were disclosed.


 Silver Run Acquisition, a blank check acquisition company focused on the energy sector, raised $450 million in its IPO by offering 45 million units at $10 per unit. The group, led by Mark Papa (ex-CEO of EOG Resources) and Riverstone, had planned to offer 40 million units. It will trade on the Nasdaq under ticker symbol SRAQU, while Deutsche Bank, Citi and Goldman Sachs served as lead underwriters.


 Deem, a VC-based provider of tech solutions for ground transportation operators, has acquired Whisk, a SaaS back-office solution for the ground transportation market. No financial terms were disclosed. Whisk backers included Correlation Ventures and ff Venture Capital. www.deem.com

 Oracle (Nasdaq: ORCL) has agreed to acquire Ravello Systems, a Palo Alto, Calif.-based company that helps move workloads from one environment to another. No financial terms were disclosed. Ravello has raised over $50 million in VC funding from firms like Sequoia Capital, SanDisk Ventures and Qualcomm Ventures. Read more.


 Dalian Wanda Group, a Chinese conglomerate, said that it will announce a “major deal” on Friday, but did not provide further specifics. Read more.

 Datacastle, a Seattle-based provider of enterprise endpoint backup and archiving solutions, has acquired the global worldwide endpoint data protection assets of Seagate Technology (Nasdaq: STX). No financial terms were disclosed. Datacastle backers include CM Capital and OneVentures. www.datacastlered.com

 The London Stock Exchange has entered into merger talks with Germany’s Deutsche Borse. Read more.

 Thycotic, a Washington, D.C.-based account management solutions for global organizations, has acquired Arellia, a Lehi, Utah-based provider of Windows endpoint security and application control software. No financial terms were disclosed. Thycotic is backed by Insight Venture Partners. www.thycotic.com

 Tsinghua Unisplendour Corp. of China has pulled out of a $3.78 billion agreement to acquire a 15% stake in Western Digital Corp. (Nasdaq: WDC), following U.S. regulatory scrutiny. The decision has pricing implications for Western Digital’s existing agreement to acquire SanDisk Corp. (Nasdaq: SNDK). Read more.

 Viacom (Nasdaq: VIAB) said that it will sell a minority stake in Paramount Pictures to an undisclosed buyer. Read more.

 Williams Cos. (NYSE: WMB) is seeking a buyer for Canadian assets that could be valued at upwards of $1 billion, according to the WSJ. Read more.


 1955 Capital has been launched by Andrew Chung, previously a partner with Khosla Ventures, to invest in U.S. tech companies that can be commercialized in China and other developing markets. The firm already has secured $200 million for its debut fund. Read more.

 CVC Capital Partners has raised $1 billion for a new growth equity fund focused on “high-growth, middle-market companies in the software and tech-enabled business services sectors.” www.cvc.com

 Lexington Partners has opened a new office in Santiago, Chile. It will be led by principal Jose Sosa del Valle. www.lexingtonpartners.com

 Morgan Stanley Alternative Investment Partners has raised $225 million for its first Private Markets Income Fund, which will invest in “niche income-oriented private market strategies, across primary fund commitments, co-investments and secondaries.” www.morganstanley.com

 TLV Partners, an Israel-based VC firm co-led by Rona Segev (ex-Pitango, Evergreen) and Eitan Bek (ex-Pitango), has closed its debut fund with $115 million in capital commitments. www.tlv.partners


 Jack Levy has agreed to join Centerview Partners as a partner. Last summer he stepped down as co-chair of global M&A with Goldman Sachs, where he had spent 15 years. Read more.

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