Sloppy thirds

Yahoo may squeeze out a third activist helping. Starboard's Jeff Smith is following where uppity investors Dan Loeb and Carl Icahn have trod before him. He doesn't exactly have fresh ideas but Yahoo could nevertheless benefit from the attention.

Starboard Value on Friday urged Yahoo boss Marissa Mayer and her board to do four things. First, it said the wayward internet company should unwind its investments in Asia in a tax-free manner. Alibaba's initial public offering confirmed they account for a whopping portion of Yahoo's $40-billion market value. Next, Starboard reckons Yahoo can slash up to $500 million in costs. Third, acquisitions of flashy, unprofitable companies such as Tumblr should be scrapped. Yet, fourth, Yahoo should buy $3.5-billion rival AOL.
 
Yahoo and its advisors have spent years trying to figure out how to unload minority holdings in China and Japan without getting hit with a whopping tax bill. Its stake in Alibaba is worth about $36 billion, and Yahoo Japan almost $8 billion. If Yahoo had figured out a way to sidestep the IRS, it probably would have done so by now. Loeb almost certainly pressed for a solution.

Having Alibaba buy assets, inject them and cash into a subsidiary and then exchange that entity for Yahoo shares may sound tempting, but satisfactorily arranging such a series of transactions would be fraught with complexity and risk. Starboard even hints that AOL could be part of such an arrangement.

Merging the two internet granddaddies is another idea that has done the rounds since Yahoo spurned a takeover bid from Microsoft in 2008, thus inducing Icahn's ire and getting him onto the board. According to Starboard, there's $1 billion in savings to be wrung from combining Yahoo and AOL. That sounds optimistic. The figure represents a third of their combined operating expenses. Investors ascribe almost no value to Yahoo's own business, according to Breakingviews calculations, which would make paying a premium to double down on it a curious decision. The same sum-of-the-parts analysis may also work in Starboard's favour, however.

Yahoo should generate more than $1 billion of Ebitda (earnings before interest, taxes, depreciation, and amortisation) this year. If agitating can help make the case the company is worth something more than Alibaba, Yahoo Japan and the cash on its books, there indeed may be money to be made.