What Warren Buffett sees in Yahoo!
Buffett is a stranger to dot-coms, but not to financing buyouts His company is “a new type of player in the capital markets”
It’s well-known that Warren Buffett stayed on the sidelines through two Internet booms—he often says he avoids getting into industries he doesn’t understand. He’s become a bit less allergic to technology in recent years: His company holds IBM and, as of March 31, a $1 billion stake in Apple. More surprisingly, Buffett is said to be backing a group bidding for assets of Yahoo! Has he also come around on Web companies?
Not necessarily. The Yahoo assets for sale—which include finance, sports, and video sites—are arguably media properties. “That’s something he knows,” says Richard Cook at Cook & Bynum Capital Management. Moreover, depending on how the deal is structured, Buffett may be able to make money from the ailing Yahoo even if it’s not a great business, so long as it simply stays alive.
Buffett, as chairman of the conglomerate Berkshire Hathaway, is working with an investor consortium that includes Quicken Loans founder Dan Gilbert, say people familiar with the matter. He confirmed he was willing to back Gilbert in a CNBC interview on May 16. The group is one of several making an offer for Yahoo’s Internet assets. The competition includes Verizon Communications, which owns AOL.
Yahoo was once synonymous with the Web, having helped millions of people discover e-mail and the Internet in the 1990s. It’s struggled in the past decade to compete with Facebook, Twitter, and Google.
Still, there’s a business there, and it’s not that complicated. Display ads generated the largest portion of Yahoo’s revenue in the first quarter— about 44 percent of the $859 million the company took in, excluding sales shared with partner sites. Buffett “has owned media and advertising businesses for 40 or 50 years,” says Cook. His profitable stock picks have included media company Capital Cities/ABC in the 1980s, and his current holdings include dozens of newspapers and a Miami television station.
There aren’t many details available on Buffett’s potential role in a Yahoo offer, and Buffett, Yahoo, and Gilbert’s Quicken declined to comment. Buffett told CNBC: “Yahoo is not the type of thing I’d ever be an equity partner in.” But he has a history of providing other kinds of financing for buyouts, as well as patient capital for companies in crisis. In those deals, he got terms that let him and his investors profit even when share prices didn’t soar.
In 2014, Buffett put up $3 billion to help Burger King Worldwide with its takeover of Canadian doughnut chain Tim Hortons. And during the 2008 financial crisis, he injected $5 billion into Goldman Sachs Group. In both cases, Buffett acquired preferred shares that paid high dividends—9 percent and 10 percent, respectively. He also got warrants, which could be used to buy stock cheaply in the future.
Buffett has said such terms can open the way for investments in industries where he has little personal expertise. “I knew they wouldn’t go out of business,” he told Berkshire shareholders in 2010, explaining an agreement the previous year to buy debt in Harley-Davidson that paid 15 percent. Berkshire may be able to extract unusually good terms for such deals, since it’s big, well-financed, and able to act quickly. “Berkshire is rapidly becoming a new type of player in the capital markets,” says Steve Wallman, a money manager in Middleton, Wis., who has invested in the company since the 1980s.
If Buffett backs a Yahoo deal, “he’ll get his terms,” says David Rolfe, who oversees holdings including Berkshire shares at Wedgewood Partners. “He always does.”
The bottom line Buffett can sometimes structure attractive deals to profit from companies he wouldn’t ordinarily buy.