AOL-Yahoo: It's All Over But the Shouting for Carol Bartz

It sure looks like Yahoo!'s CEO, Carol Bartz, just checkmated herself in her long-running chess game with Wall Street. The woman who was brought in to the company after a frustrating takeover fight with Microsoft almost three years ago was supposed to maximize the company's value. In the end, it's looking like she'll end up selling the company against her will.

A group of private equity firms is talking to AOL about how to dismember Yahoo!, the WSJ reports, giving the newly independent internet firm a chance to buy a rival 8 times its size for nearly nothing. Naturally, that story set Yahoo!'s stock on fire in ways that nothing else the company has done could have.

The WSJ neatly captured the strategy of the raiders:

One of the scenarios under discussion among the buyout firms is a complex deal in which China's Alibaba Group would buy back Yahoo's roughly 40% stake in Alibaba, the people said.

Some of Yahoo's other assets would also be sold off to interested media or technology companies, and the remaining company would be of a much smaller valuation that private-equity firms could get financing for, one of the people said.

Another scenario involves AOL combining its operations with Yahoo in a reverse merger after Yahoo disposes of the Alibaba stake, the people said. It is unclear if the resulting entity would be listed publicly.

Years ago, Yahoo!'s founder Jerry Yang gave Jack Ma a helping hand in with his Chinese internet company. That stake -- along with another stack in Yahoo! Japan -- has become so valuable that it currently accounts for almost all of Yahoo!'s market capitalization. Neither stake, however, has much strategic value to Yahoo!'s future growth.

Alibaba.com wants to go public. But first they would like to buy back the 39% of the company that Yahoo! controls. The $10 billion figure keeps popping up.

Smart Carol Bartz knows that her 39% of Alibaba.com is probably worth more than what Ma wants to pay for it. Otherwise, why would he want to buy it. If Yahoo! can just hold out, she thinks, that stake will be worth a lot more after the IPO.
In a stroke, Bartz could add billions in value to her company and her tenure would look much more successful. Bartz has had such trouble articulating what the pile of assets she took over amounts to as an enterprise that it should not surprise us she would hold on tight to the Alibaba.com. A win is a win. The stake in Alibaba.com looks like an easy win. And Bartz really needs one.

That short-term, tactical thinking is what will allow Bartz to be outflanked by the financial community. In our age of radical transparency, it is hard for a company with Yahoo!'s visibility to hide much at all from a financial world that watches intently.

With all eyes on her Bartz should have sold the stakes in both Asian companies and giving the cash back to her shareholders. Along the way, she could have used some portion of the money to buy AOL herself instead of being bought by the smaller firm.

There are many good reasons for the company to be combined. The foremost is that both are content companies that sell ad space. That's a business that benefits from three things: scale, scale and more scale. Former internet analyst Henry Blodget laid out the ineluctable logic of the AOL-Yahoo! combination a few weeks ago.

The combined distribution business would have more leverage with Hollywood, the music industry, and other content creators. Why is the cable industry so powerful? Scale. Once again, the more people you reach, the more valuable you are as a distribution platform. This combination would bring more distribution scale.

If doing a deal with AOL is such a no brainer, why hasn't Bartz done it herself? The answer may have less to do with Bartz's out-sized personality and more to do with the situational imperatives of being a chief executive. Bartz was brought in to rationalize a company that was a takeover target. Her job was to spruce Yahoo! up to win back a frustrated suitor, Microsoft.

Much of her strategy is colored by the botched 2008 takeover. Microsoft's offer, well above where the stock currently trades even on the AOL rumors, created an emotional anchor price for Yahoo!'s stakeholders, including Bartz herself. Liquidating the non-strategic stakes in China and Japan would just have looked like another admission of defeat.

Call it the small Yahoo! strategy. None of the central players at Yahoo! see themselves as small so it would have been hard for them to make that move. Now someone else is forcing the issue.

That's the danger of holding cash as a corporation these days. Yahoo!'s market capitalization offered nothing for the value of the active enterprise itself. Wall Street has already monetized Alibaba.com stake for Yahoo!.

They're doing the math on multiple transactions and, most likely, shopping all of the potential pieces before even picking up the phone.This brought out the sharp pencils who see more value in the parts of a company than their sum. From there it was only a short leap for outsiders to see how to make it all happen.

Granted, the AOL-Yahoo! deal is by no means done. Yahoo! is said to have locked up Goldman Sachs as an adviser late last night. That may just saber rattling to drive the price up to $24 where Yahoo! is said to be ready to sell.

That's just negotiating over price. A crucial line has been crossed. Yahoo! is now totally in play and the only strategy left is how to play the end game.

Image of Yahoo! sign courtesy of Thomas Hawk via Flickr
Image of No Y! courtesy of Dave Ward Photogrpahy via Flickr