Yahoo’s (NASDAQ:YHOO) new CEO, Marissa Mayer, has drawn media attention for her Google background, her popularity among technology watchers, and for the fact that Yahoo has languished as a lower-tier technology company for several years. While Google (NASDAQ:GOOG) has stormed past Yahoo in the search engine industry, become a Wall Street darling with a $190 billion market cap, and now expanded its product line into smartphones and web browsing, Yahoo’s stock is down 40% in the last five years (compared to a 10% rise for the NASDAQ and Google). Yahoo’s stock price has also been in decline this year while the NASDAQ has been up 5%. Mayer, according to the tech media, is the best hope to turn around the struggling company. Who stands to gain if Mayer successfully turns Yahoo around, or stands to lose money if she cannot? Hedge fund managers do- YHOO, with 60 hedge funds owning it in their portfolio, is one of the top ten technology stocks among hedge funds.
The largest hedge fund shareholder of Yahoo is Dan Loeb’s Third Point, which had been increasing its holdings up to over 70 million shares of YHOO as Loeb agitated for changes to the company after initiating a 48 million share position in summer 2011. At the end of March, Third Point reported over a billion dollars in Yahoo shares. Loeb played a leading role in forcing out Yahoo’s former CEO Scott Thompson after his stake allowed him more influence over the company’s Board of Directors, including board seats for himself and allies; among other tactics, Loeb accused Thompson of lying about his academic record (see more about Third Point’s stock holdings). Loeb, due to his influence over the Board and Mayer’s selection, likely has confidence that she can execute a turnaround. Until the share price rises and gives him a chance to profit from his work, Third Point is likely to remain a major shareholder.
Perry Capital, managed by the event-driven manager Richard Perry, doubled its stake in YHOO in the fourth quarter of 2011 and added to it further in the first three months of 2012. Perry now owns 13 million shares (find out what other companies Perry Capital has invested in). Jeffrey Tannenbaum’s Fir Tree Capital did not have a position in Yahoo at the end of 2011, but bought 11.3 million shares in just three months to become another major hedge fund shareholder. It is likely that Fir Tree believed that Loeb’s activism would boost the share price, and decided to invest alongside the famous investor (see what else Fir Tree has been buying). While it is also possible that this was Perry’s thinking, we have noticed that Perry tends to avoid hostile activist situations. The strategy behind his investment is more of a mystery. It should be noted that both Perry and Fir Tree have the same stock at the top of their 13F portfolio- Express Scripts (NASDAQ:ESRX), which recently acquired its rival Medco Health Solutions.
Yahoo and Mayer got something of a head start in their quest earlier this week when Yahoo announced earnings that beat analyst expectations, though the stock had little response (see more details about Yahoo’s earnings report). As it stands, Yahoo’s trailing P/E is around 18, roughly even with Google’s despite Google being the market leader in search and attempting to generate growth from a number of other businesses. Yahoo can also be compared to the aging AOL (NYSE:AOL), which has rallied 83% so far this year on excellent earnings, and Microsoft (NASDAQ:MSFT), which trades at a trailing P/E of 11. Microsoft partners with Yahoo in search, and like Google is attempting a full-scale product plan in many new software and hardware areas (as well as, of course, being the market leader in thus-far profitable operating system and office software). S&P assigns Yahoo’s Asian assets a value of $9/share and their other assets a value of $8-9/share, with net cash bringing the total value to around $20, above its market price; however, S&P also considers MSFT a buy and assigns a high price target to GOOG. This makes Yahoo a questionable pick for a value investor unless the combination of Mayer and Loeb inspires a great deal of faith.
