What Does War­ren Want With 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”

Bloomberg Businessweek (North America) - - Markets/Finance - Buf­falo News BH Me­dia Group in­clud­ing 32 daily pa­pers and 47 paid week­lies WPLG-TV Mi­ami

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 te terms can open the w way for in­vest­ments in ind in­dus­tries where he has littl lit­tle per­sonal ex­per­tise. “I knewk they wouldn’t go out o of busi­ness,” he told Berk Berk­shire share­hold­ers in 20 2010, ex­plain­ing an agreemen ment the pre­vi­ous year to b buy debt in Har­leyDavid­sonD Dav that paid 1 15 per­cent. Berk­shire may be able to ex­tractt t 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.” �Noah Buha­yar The bot­tom line Buf­fett can some­times struc­ture at­trac­tive deals to profit from com­pa­nies he wouldn’t or­di­nar­ily buy.

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