It's no secret that Yahoo's internet businesses are essentially worthless, if you go by its share price. The question for both Yahoo and investors is how to convert the value of these businesses into cash that they can pocket.
The problem has become urgent following Alibaba's very public launch, when its share price jumped from $68 to $90. That meant Yahoo's 16.4 percent stake in Alibaba was worth around $36bn, while the whole of Yahoo — at a $40 stock price — was only worth about $40bn.
The situation is actually much worse than that. Yahoo also owns 35 percent of Yahoo Japan, which is worth $7.7bn, it has raised $8.33bn from the sale of 140 million Alibaba shares, and it has about $2.75bn in cash, as Bret Kenwell explains.
So, if we assume that Yahoo's actual internet businesses are worth a modest $5bn, then according to these numbers, Yahoo has a total value of around $60bn. Since its stock market value is only $40bn, there's up to $20bn (less taxes) dangling in front of anyone who can figure out a way to get it.
Starboard Value LP has been buying Yahoo shares and has already delivered a letter to Yahoo, saying: "Our approach to such investments is to actively engage and work closely with management teams and boards of directors in a constructive manner to identify and execute on opportunities to unlock value for the benefit of all shareholders."
Starboard values the Alibaba stake at $34bn and calculates a "value gap" of $11.3bn. It points out that "Yahoo's current stock price would imply negative $11 billion of value for Yahoo's core business".
This, says Starboard, "is likely due to the fact that investors currently expect Yahoo to continue its past practices of (a) monetizing its non-core minority equity stakes in a tax inefficient manner and (b) using the cash proceeds from such sales to acquire businesses at massive valuations with seemingly little to no regard for profitability and return on capital."
Marissa Mayer has spent $1.3bn since she became CEO in 2012. Although Yahoo's share price has gone up a lot, its sales and profits have not.
One thing that counts against Starboard's plan is the idea of "exploring a strategic combination with AOL". It suggests it could reduce overheads by $1bn by combining their display advertising operations and eliminating a lot of management jobs. But this is something that Yahoo's staff would fight, bitterly. When there's $11bn to $20bn to be extracted from Yahoo, it doesn't make sense to alienate the company over a hypothetical $1bn.
However, there are plenty of companies like Starboard, and there are well known investors such as Carl Icahn, so this is unlikely to be the last such proposal. And some investors will think that Yahoo's current share price makes it a one-way bet. They can't lose their money even if Yahoo goes bust, because it's more than covered by the Alibaba and Yahoo Japan holdings.
This puts Yahoo firmly "in play" as a target for activist investors, asset strippers and potential takeovers.
Of course, things could go wrong. A boom in Yahoo's share price and the collapse of Alibaba shares would change the calculations somewhat.
But Mayer now has a serious problem: she has to make the business perform financially. As Ironfire Capital founder and Yahoo investor Eric Jackson said: "Mayer is really under the gun to create value for shareholders and prove she is doing a better job than anyone else can do."
Mayer is already shutting down products that aren't earning their keep. More than 60 have gone, and the web directory that started the whole thing will "retire" at the end of the year. If your business depends on any Yahoo services, it would be a good time to evaluate their importance both to you and to Yahoo.
Disclaimer: Please note that I do not deal in shares, I do not own any Yahoo shares, and I am not going to buy any Yahoo shares. Also, I am totally unqualified to give financial advice, so I don't. No sensible person would trust me with their lunch money.