November 27, 2011 7:39 pm

Yahoo hopes to breathe life into core business

Yahoo would use the cash from selling a large minority stake in the company to pay for deals that could breathe new life into its existing internet properties, according to a person close to the situation.

Raising cash from a new outside investor to reinvest in its core business is at the centre of the US internet company’s efforts to revive its stock price and fend off unhappy shareholders.

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While a sale of the whole company has not been ruled out, Wall Street’s diminished appetite for such large transactions makes that outcome unlikely, the person close to the situation indicated. “Those kinds of deals are typically not getting done today.”

News in recent weeks that it has entered confidential talks with private equity firms Silver Lake and TPG about taking a potential minority investment has raised concerns among some shareholders. They have seen it as a financial manoeuvre to bring in an ally and strengthen the company’s hand in any future fight for control.

With $2.9bn of cash and investments at the end of September, the internet group is not in need of a recapitalisation, according to these people. Also, it would leave the new private equity investors in prime position to scoop up a large part of the future gains if Yahoo eventually sheds its investments in Asia.

“Are they trying to take that value later for a smaller group?” asked one shareholder, who described the plan as mainly defensive.

However, the person close to the situation said the negotiations to bring in a minority investor were strategically motivated and were part of an attempt to boost the company’s online properties that began with the sacking of Carol Bartz as chief executive three months ago.

A minority investment would make “incremental capital available for deals” and enable the company to “enhance and build on” its online platform, this person said. While it still attracts about 800m users and some of its online services, such as news and finance, remain leaders in their categories, Yahoo’s influence has waned with the rise of social networking.

Also, bringing in an outside investor with deep experience and connections in Silicon Valley “can bring expertise to help the company think through its options”, the person said.

Coming up with terms that are attractive to a private equity investor without alienating existing shareholders is likely to prove challenging, others familiar with the process warn.

“It’s dead under the conditions we see currently,” said one.

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