Why bids for Yahoo might come in $6 billion lower than expected

When Yahoo put itself on the auction block, bids were expected to land between $6 billion and $8 billion -- far below the company’s $34.6 billion market capitalization, but no paltry sum considering the vast majority of that valuation comes from its stake in Alibaba.

But a Wall Street Journal article published Thursday night said Verizon Communications Inc. and other bidders were expected to offer just $2 billion to $3 billion in the auction for Yahoo’s core business.

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The declining sales price may seem like more terrible news for the struggling Sunnyvale, Calif., tech firm. But the precipitous drop likely has more to do with what bidders are defining as Yahoo’s core business than Yahoo’s declining fortunes.

Yahoo’s publishing properties, such as Yahoo Mail, Yahoo News and Yahoo Finance, are definitely seen as part of the core and have been valued by SunTrust Robinson Humphrey at about $1.5 billion. With that in mind, a $2 billion to $3 billion bid could be reasonable, said Robert Peck, managing director at SunTrust Robinson Humphrey.

But other assets could also be lumped into the core, including the royalties from Yahoo Japan, valued at about $1 billion, the company’s intellectual property, which could be worth $1 billion to $3 billion, and its real estate, another potential $1 billion, Peck said. If everything is included, a total bid could amount to between $6 billion and $8 billion, according to Peck’s April 13 note to clients. (The Alibaba stake -- recently valued at $32 billion -- is not in play).

“The real question here is what is defined as the core, and therefore what are you willing to pay for it,� he said. “Mathematically it’s almost impossible to get to the $2 billion to $3 billion if it includes all of the other assets like the IP, the royalties and the real estate.�

Peck said the most “logical conclusion� for the company is a sale of its core business, likely to Verizon. The broadband and telecommunications giant bought AOL Inc. last year and would have “strategic overlaps� if it also purchased Yahoo’s core, he said.

Verizon believes that “to be on the Internet, you need to have scale, and AOL plus Yahoo would give them that scale,� Peck said. “And ... there’s a lot of overlapping costs.�

Yahoo declined to comment on what it described as “rumors.�

The Journal said Yahoo has set the first week of June as the deadline for the next round of bids, though it’s not clear whether that will be the final round.

Shares of Yahoo were down 33 cents, or 0.89%, to $36.69 in morning trading on Wall Street.

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