Analysis: Yahoo's Asia assets in investor spotlight

By Alexei Oreskovic

SAN FRANCISCO | Tue Jul 27, 2010 5:57pm EDT

(Reuters) - Yahoo Inc's (YHOO.O) plans for its Asian assets are in the investor spotlight, following the surprise news that Yahoo Japan has turned to Google Inc (GOOG.O) for its Internet search technology.

Yahoo Japan -- an independent company in which Yahoo holds a 35 percent stake -- diverged from the course set by Yahoo, which has forged a pact with Microsoft Corp (MSFT.O) for Web search technology.

For investors that have long eyed Yahoo's Asian holdings as attractive spin-off candidates, the move by Yahoo Japan could bolster the argument that the time has come for Yahoo to cash out some of its overseas investments.

"If they're not going to work nearly as closely, if at all, going forward, is it as much of a strategic asset?" said UBS analyst Brian Pitz of Yahoo's investment in Yahoo Japan.

He said the move by Yahoo Japan could "reignite" conversations between investors and Yahoo management about the future of the company's Asian holdings.

"Investors have been wanting them to sell Asian assets for awhile," said Pitz.

In addition to its investment in Yahoo Japan, Yahoo has a 44 percent stake in Alibaba Group, China's leading business-to-business e-commerce Web site. Yahoo's investment in Alibaba Group also gives it stakes in fast-growing Alibaba subsidiaries, including online retailer Taobao and Alipay.com, which provides online payment technology.

Barclay's analyst Douglas Anmuth said Yahoo Japan's deal with Google suggests a "significant deterioration" in the relationship between Yahoo and Yahoo Japan. In a note to investors Tuesday, Anmuth said he believed a near term sale of Yahoo's Japanese stake was now more likely, as Yahoo may be less concerned about the impact of a sale on Yahoo Japan's shares.

Yahoo shares finished Tuesday's regular trading session down 1.4 percent to $13.95, while Microsoft's shares increased 0.2 percent to $26.16.

Competition in the Internet search market has heated up during the past year, as Microsoft has unveiled an improved version of its Bing search engine.

Last July, Yahoo and Microsoft signed a 10-year deal that calls for Microsoft to provide the back-end technology powering search on Yahoo's websites, in a bid to create a strong Number 2 search entity to compete with Google, which controls a majority of the worldwide Internet search market.

Synovus Securities portfolio manager Daniel Morgan said that investors may view the Yahoo Japan news as a setback for the Yahoo-Microsoft search alliance and said it raises questions about the global prospects of Microsoft's search technology.

At a news conference on Tuesday, Yahoo Japan President Masahiro Inoue said the Japanese firm had concluded that Microsoft's search technology was not sufficiently strong enough for its needs, giving Japanese language search capabilities as one example.

"It is kind of a kick in the face to them," Morgan said about Microsoft, whose shares his firm owns.

Yahoo, which generated $6.5 billion in 2009 revenue, said in a statement that it does not anticipate that Yahoo Japan's deal with Google will have a material financial impact on its revenues.

According to Yahoo's 2009 10-K filing, Yahoo generated $303 million in revenue last year by providing search ads for Yahoo Japan, and $296 million in 2008.

Some analysts noted that Yahoo Japan's deal with Google -- whose search advertising technology is considered best-of-breed by analysts -- could actually increase the value of Yahoo's Japanese investment.

"If Yahoo Japan is making decisions it thinks are in the best interest of its business, it's probably a benefit to Yahoo, with its ownership," said Oppenheimer & Co analyst Jason Helfstein.

Yahoo said the fair value of its 35 percent stake in Yahoo Japan at the end of 2009 was $6 billion, according to its 10-K filing. But the company has indicated that a sale of any of its Asian assets is probably not in the cards in the near term.

At Yahoo's analyst day in May, Finance Chief Tim Morse laid out the case for why the company believed that selling its Asian assets would have negative tax consequences and ultimately prove less beneficial to the company that retaining the assets.

That hasn't satisfied everyone on Wall Street.

"An unanswered question is could you do some kind of tax-free spinoff to shareholders," said Oppenheimer's Helfstein.

Whatever the changing relationship between Yahoo and Yahoo Japan, Citi analyst Mark Mahaney said he believed any re-evaluation by Yahoo of its Asian assets will unfold slowly.

"I don't think this kind of news would change it in the next year or two," said Mahaney. "It could change it in the next five years."

(Reporting by Alexei Oreskovic, editing by Bernard Orr)

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