There’s an internet company with Yahoo (YHOO) in its name that has stayed on top of its user base by offering strong content and services, including an auction site and a robust news service. Unfortunately for Yahoo, this particular company shares nothing with its American counterpart aside from, well, shares and the name. We’ll look at why buyers may be more interested in Yahoo’s Japanese counterpart and how the the tie up between the two is driving the value in the deal. (For more, see the Top 4 Companies Owned by Yahoo.)

Diverging Paths

Yahoo’s ongoing struggles are, in part, due to the greater competition it has faced as a web portal in North America. Alphabet Inc. (GOOGL) and MSN took Yahoo on and the fights for eyeballs have left Yahoo in a situation where its main business goal is to successfully sell itself off. Yahoo Japan, on the other hand, hasn’t faced the same caliber of competition, not the sustained onslaught. There are a few factors that may have played into this:

  • The language barrier always affects web content in that adding a new language involves investment. Although Japan’s population is large and affluent, the language cost and the demographic shift to older consumers push it down on many web companies priority lists.

  • The first mover advantage that Yahoo Japan enjoyed is still feeding it. Yahoo Japan hasn’t been seriously challenged, so many of the content producers in Japan have longstanding partnerships with Yahoo Japan. Traditional business ties don’t break easily in Japan.

  • Yahoo Japan now has the size where even new content producers see it as a necessary portal to get their content out there. A new competitor to Yahoo Japan would need to convince these content producers to offer some exclusivity, which is a hard sell without scale.

  • Yahoo Japan is more than just a content portal. It made many of the same plays that Yahoo did like video streaming service, auction sites and so on, but they were able to survive in Japan whereas Yahoo U.S. was pushed out by more focussed rivals (eBay for example). Yahoo Japan is continuing its broader bets with investments in business incubators, a games business, credit cards and more.

The Benefit To Yahoo

Owning a portion of Yahoo Japan along with Alibaba (BABA) may be where most of the value is left in Yahoo. Alibaba is a growth engine and Yahoo Japan is a slower grower but a great revenue generator. Furthermore, Yahoo Japan is paying licensing and fees to Yahoo that have hidden just how bad things are on the revenue side for Yahoo. Some analysts have put the value of Yahoo’s own business near zero simply because it is no longer growing - a death sentence for any online business. That’s a bit harsh, as there is still a brand there, hope of a turnaround, and a market need to have some more options in online advertising than just Google. (For more, see Yahoo: An Activist Investment Analysis.)

The question is whether the bidders are really after Yahoo’s portfolio of investments instead of Yahoo as a serious business. Some have pointed out that there are potential downsides to this approach on the tax side as a you are purchasing a corporate structure rather than just shares on the open market. The tax argument is weak as there is always a way to offset the implications when you have entire finance departments dedicated to your corporate tax bill.

The Bottom Line

Yahoo is not in great shape. They’ve been struggling to find their way and very little has panned out for them. The acquisition of Tumblr for $1.1 billion brought in users, but little else of note. Despite its online roots, Yahoo is starting to feel like a traditional media outlet trying to stay relevant on the internet, porting over digital magazines, creating rich content stories and spending without much return. The bidders shouldn’t be in it for the remains of a once great internet portal, so that suggest that it is Yahoo Japan and Alibaba driving a lot of the value in the bids. The question for the buyer will be what to do with the company that comes with those shares.

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