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Valuing Yahoo! in 2013

Harvard Business School Case 214-0
Courseware 9-215-709

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1
Exhibit 1 - YHOO Income Statement

12 Months Ending
2007 2008 2009 2010 2011 2012

(USD, Millions) (USD, Millions)

Revenue 6,969 7,209 6,460 6,325 4,984 4,987 Revenue
Revenue Growth 3% -10% -2% -21% 0%
Cost Of Goods Sold 2,839 3,023 2,872 2,682 1,587 1,621 Cost Of Goods Sold
Gross Profit 4,131 4,185 3,589 3,643 3,397 3,366 Gross Profit
Gross margin 59% 58% 56% 58% 68% 68%
41% 42% 44% 42% 32% 32% ###
### 100%
Selling General & Admin Exp. 2,244 2,268 1,826 1,752 1,619 1,642 Selling General & Admin Exp.
R & D Exp. 1,084 1,222 1,210 1,029 919 886 R & D Exp.
Amort. of Goodwill and Intangibles 107 88 39 32 34 36 Amort. of Goodwill and Intangibles
Total Operating Expenses 3,435 3,578 3,075 2,812 2,572 2,563 Total Operating Expenses
83% 85% 86% 77% 76% 76%
Operating Income(EBIT) 695 607 514 830 825 803 Operating Income

Net Interest Income / (Expense) 94 77 22 23 19 42 Net Interest Income / (Expense)

Other non-operating Income / (Expenses) 175 (1) 289 613 461 5,046 Other non-operating Expenses

Pre-tax Income 965 684 825 1,466 1,304 5,891 Pre-tax Income

Total Net Income 639 419 598 1,232 1,049 3,945 Total Net Income

Amort.exp/Revenue 2% 1% 1% 1% 1% 1%
R&D Exp/Revnue 16% 17% 19% 16% 18% 18%
SGA Exp/Revenue 32% 31% 28% 28% 32% 33%
Revenue by Segment
12 Months Ending
(USD, Millions) 2008 2009 2010 2011 2012
Display 2,043 1,867 2,155 2,160 2,143
Search 3,754 3,396 3,162 1,853 1,886
Other 1,412 1,197 1,008 971 958
Total 7,209 6,460 6,325 4,984 4,987

Gross Margin 68%

Cost percentage of Sales 32%
2012 2013 2014 2015 2016 2017

(USD, Millions)
Revenue 4,987 7,209 6,460 6,325 4,984 4,987
Cost Of Goods Sold 1,621 3,023 2,872 2,682 1,587 1,621
Gross Profit 3,366 4,185 3,589 3,643 3,397 3,366
1
Selling General & Admin Exp. 1,642 2,268 1,826 1,752 1,619 1,642
R & D Exp. 886 1,222 1,210 1,029 919 886
Amort. of Goodwill and Intangibles 36 88 39 32 34 36
 Total Operating Expenses 2,563 3,578 3,075 2,812 2,572 2,563

Operating Income 803 607 514 830 825 803

Net Interest Income / (Expense) 42 77 22 23 19 42

Other non-operating Income / (Expenses) 5,046 (1) 289 613 461 5,046

Pre-tax Income 5,891 684 825 1,466 1,304 5,891

Total Net Income 3,945 419 598 1,232 1,049 3,945

 Quarterly Financials
Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013

1,217 1,324 1,221 1,218 1,202 1,346 1,140 1,135

-7% -7%
384 419 398 415 395 412 344 336
833 905 823 802 807 934 796 800
30% 30%
32% 32% 33% 34% 33% 31% 30% 30%
420 402 410 409 405 419 390 418
229 236 228 200 217 240 220 236
8 9 10 10 8 8 7 8
658 646 648 618 630 667 617 663
79% 71% 79% 77% 78% 71% 78% 83%
175 259 175 184 177 267 179 137

4 5 - 4 9 23 26 24
176 116 169 67 4,749 67 216 225

354 379 344 255 4,935 357 421 385

293 296 286 227 3,160 272 390 331

34% 35% 32% 35%

18% 20% 18% 20%
35% 30% 34% 34% 1% 1% 1% 1%
Exhibit 1
Key Assumptions
0 1 2
2013 2014 2015
1 Revenue Growth 5% 4% 4%
2 Cost percentage of Revenue 30% 30% 30%
4 Effective tax rate 35%
5 Amort./Revenue 1%
6 R&D Exp/Revenue 18%
7 SGA Exp/Revenue 35%
8 Discount Rate 8.89%

FCFF Calculations
12 Months Ending
Nth Year 0.5 1.5 2.5
Year 2012 2013 2014 2015
(USD, Millions)
Revenue 6,969 7,318 7,610 7,915
Cost Of Goods Sold 2,839 2,195 2,283 2,374
Gross Profit 4,131 5,122 5,327 5,540

Selling General & Admin Exp. 2,244 2,561 2,664 2,770

R & D Exp. 1,084 1,317 1,370 1,425
Amort. of Goodwill and Intangibles 107 73 76 79
Total Operating Expenses 3,435 3,952 4,110 4,274

Operating Income(EBIT) 695 1,171 1,218 1,266

NOPAT 761 791 823
Plus Depreciation
Amort. 73 76 79
Minus CapEx
Net change in WC
FCFF 834 868 902
Terminal Value
Discount Factor 0.8801 0.8082
PV of FCFF 764 729
PV of TV
NPV(Year2014 and after) 10,637

NPV of Yahoo! Core 10,898

Exhibit 3
Sensitivity Analysis
Growth starting from 2019
 10,898 -5% -3% 0% 3%
8.00% 8,708 9,712 12,158 17,540
Discount 8.45% 8,392 9,308 11,495 16,092
Rate 8.89% 8,097 8,935 10,898 14,862
9.33% 7,820 8,589 10,359 13,805
9.78% 7,561 8,267 9,868 12,887
 3 4 5 6
2016 2017 2018 2019
4% 4% 4% 0% 1 Revenue Growth
30% 30% 30% 30% 2 Cost percentage of Revenue
4 Effective tax rate
5 Amort./Revenue
6 R&D Exp/Revenue
7 SGA Exp/Revenue
8 Discount Rate

3.5 4.5 5.5 6.5 Nth Year

2016 2017 2018 2019 Year Q3 2012
(USD, Millions)
8,231 8,561 8,903 8,903 Revenue 1,202
2,469 2,568 2,671 2,671 Cost Of Goods Sold 395
5,762 5,993 6,232 6,232 Gross Profit 807

2,881 2,996 3,116 3,116 Selling General & Admin Exp. 405
1,482 1,541 1,603 1,603 R & D Exp. 217
82 86 89 89 Amort. of Goodwill and Intangibl 8
4,445 4,623 4,808 4,808 Total Operating Expenses 630

1,317 1,370 1,425 1,425 Operating Income(EBIT) 177

856 890 926 926 NOPAT 115
Depreciation
82 86 89 89 Amort. 8
CapEx
Net change in WC
938 976 1,015 1,015 FCFF 123
11,417
0.7422 0.6816 0.6260 Discount Factor
697 665 635 PV of FCFF
7,147
NPV(Q3&Q4 2013) 261

m 2019
 5%
27,106
23,603
20,901
18,753
17,004
 -7%
30%
35%
1%
18%
35%
8.89%

0.25 0.5
Q4 2012 Q3 2013 Q4 2013

1,346 1,118 1,252

412 335 375
934 782 876

419 391 438

240 201 225
8 11 13
667 604 676

267 179 200

173 116 130

8 11 13

181 127 143

0.9789 0.9583
125 137
Exhibit 2
Discount Rate Calculation
effective tax rate 35%

Sh. Price MVE2 LT Debt D/E

YHOO $ 27.68 29,877 -
YHOO - Adjusted1 $ 27.68 29,877 -

GOOG $ 910.70 302,790 1,989 0.01

MSFT $ 32.01 268,084 15,600 0.06
AOL $ 37.15 2,857 - 0.00
FB $ 26.04 62,678 1,500 0.02
EBAY $ 52.31 67,846 4,123 0.06
AMZN $ 303.48 138,387 3,042 0.02
BIDU $ 110.01 38,476 1,895 0.05

Average Asset Beta

Assume Yahoo's asset beta is at the level of industry average.

Yahoo
Asset Beta 1.07
Rf-30-year 3.55%
Rm-Rf 5% Assume
Required return 8.89%
 Equity Asset
Beta4 Beta
0.99
0.99

0.99 0.98
0.79 0.76
1.03 1.03
n/a n/a
1.07 1.03
1.07 1.05
1.27 1.23

Average Asset Beta 1.07

Exhibit 4: Valuation of Alibaba based on Mayer's 2012 deal Exhibit 5: Valuation of Alibaba based on IPO

Billion Capital Gain Tax Rate 37%

Yahoo!'s Total Stake in Alibaba 42% 39.44444
Stake Sold 18% 7.10000 Billion Tax Basis
Remaining Stake 24% IPO Valuation 120.00000

Total Value of Stake in Alibaba in May 2012 Remaining Stake in Alibaba in July 2013 28.80000
39.44444 Capital Gain Tax 10.42771 0.61700
After Tax Value 18.37229
Yahoo Stock Performance from May 2012 to July 2013
25%
Exhibit 6: Valuation of Yahoo! Japan based on Market Capitalization
Total Value of Stake in Alibaba in July 2013
49.30556 Capital Gain Tax Rate 37%

Capital Gain Tax Rate 37% Billion Tax Basis

Market Capitalization 32.80000
Billion Tax Basis
Remaining Stake in Alibaba in July 2013 11.83333 Stock Ownership 35% 11.48000
Capital Gain Tax 4.15004 0.61700 Capital Gain Tax 3.41362 2.25400
After Tax Value 7.68329 After Tax Value 8.06638