A Yahoo! billboard is seen in New York's Time's Square January 25, 2010.BRENDAN MCDERMID
Having made a tidy profit off of its investment in Skype Technologies, Canada's national pension plan is weighing an even bigger, and riskier, foray into the technology sector, sources confirm.
The Canada Pension Plan Investment Board is actively considering joining a group that would make a takeover offer for Yahoo Inc., the California-based Web giant that has fallen on hard times. If such a bid were to materialize, it would likely be led by Microsoft Corp. and involve a number of other institutional investors, including Silver Lake Management LLC, a U.S. private-equity firm that was CPPIB's partner in the Skype deal.
The development underlines the growing prowess of Canada's major pension plans on the global deal-making stage, as well as the dramatic reversal in market conditions in the wake of the sovereign debt crisis in Europe and the U.S. debt-ceiling fiasco. Over the course of the summer, CPPIB decided that the market turmoil was pushing valuations low enough that it would shift its stance from being a seller of private assets to a buyer.
The potential sale of Yahoo, which has been the subject of on-again, off-again takeover rumours for years, also highlights a shift in economic power from the U.S. to China. As Yahoo struggles to compete for advertising revenue with the likes of Google, its most valuable asset is now arguably its stake in Alibaba Group Holding Ltd., a Chinese Internet company
Yahoo has a market capitalization of $20.4-billion (U.S.) and estimates its stake in Alibaba is worth $14-billion.
Yahoo effectively put itself on the auction block after firing chief executive officer Carol Bartz last month, but no deal is assured. The company has suggested that it is weighing a number of strategic options, including selling just parts of the firm, as it evaluates its future course. Interim CEO Tim Morse suggested this week that it is in no rush to make a decision.
Yahoo rejected a takeover bid of nearly $45-billion from Microsoft three years ago. But the company has struggled since amid a difficult economic environment and the growing dominance of Google Inc. and other players in the Internet advertising business. The company's profits in the third quarter were $293-million (U.S.), down 26 per cent from a year earlier. Revenue fell 24 per cent.
In addition to Yahoo's own struggles, its potential sale comes at a time when corporate valuations are soft. In May, CPPIB chief executive officer David Denison said it was a good time to be a seller; the price tags on potential takeovers were giving him sticker shock. But as markets tumbled through the summer and early fall, Mr. Denison changed his tune.
Yahoo is also hitting the block at a time when the CPPIB has a new appreciation for companies in this sector. The pension plan raised some eyebrows with its decision to contribute $300-million to a consortium that bought a 65-per-cent stake in Skype, which provides telecom services over Internet connections, in 2009. The pension plan, which manages money for the future pensions of 17 million Canadians, had tended to stick to the less-risky end of private equity investments, such as toll roads and airports.
But that consortium, which was assembled by Silver Lake and paid $1.9-billion for its Skype shares, made out well this May when Microsoft bought the business for $8.5-billion. CPPIB roughly tripled its money on the investment.
One analyst said that a buyer could double its money by buying Yahoo and breaking it up.
"This is really clever if they can pull it off," said the analyst, who spoke on condition of anonymity.
Microsoft's first priority would be to own Yahoo's search assets because the companies have a partnership, under which Microsoft manages the technology platforms that deliver search results.
But beyond that, the analyst said there's value hidden in some of Yahoo's mobile assets, which Microsoft would potentially be interested in, and perhaps more value than investors realize in Yahoo's Chinese interests.
Yahoo's stake in Alibaba is likely a lure for CPPIB, which is placing a big emphasis on Asia these days and is looking to increase its investments in the region. The pension plan opened its first office outside Canada in Hong Kong in early 2008.