Letter #117: David Sambur and Ted Seides (2023)

Co-head of Private Equity at Apollo and Cofounder of Protege Partners | Private Equity Deals with Capital Allocators Podcast Conversation

Sep 12, 2023

Yahoo, David Sambur (Apollo), S.2, EP.05 - YouTube

Hi there! Welcome to A Letter a Day. If you want to know more about this newsletter, see "The Archive.” At a high level, you can expect to receive a memo/essay or speech/presentation transcript from an investor, founder, or entrepreneur (IFO) each edition. More here. If you find yourself interested in any of these IFOs and wanting to learn more, shoot me a DM or email and I’m happy to point you to more or similar resources.

Today’s letter is the transcript of a conversation between David Sambur and Ted Seides where David lays out his history with, thesis around, and his work with turning around Yahoo!. David first gives an overview of Apollo’s history and style before the pair dives into the current state of Yahoo!, the economics behind the brand, their ownership history, internal opportunities, deal structure, developing assets, potential tuck-in acquisitions, generating further growth, competition amongst peers, and lessons learned from the deal.

This conversation was particularly interesting given Yahoo!’s history: it was once one of the most valuable companies in the world and made one of the all-time great investments ($1bn for 40% of Alibaba), but gradually lost its luster.

Below is an excerpt I previously wrote on Yahoo! describing its fascinating history:

Yahoo! was founded in 1994 and incorporated in 1995, and was one of the fastest growing and largest technology companies of all time, once being valued at >$100bn.
They're also known for having made one of the boldest venture bets in history -- a $1bn dollar investment for 40% of a little company called Alibaba (today, that investment would be worth ~$100bn by itself).
By the late 2000s, Yahoo!'s core business was starting to struggle, and Microsoft was eyeing an acquisition. However, Yahoo! didn't want to sell. This resulted in Carl Icahn stepping in, writing a series of letters to Yahoo! management and shareholders, urging them to take the deal. Ultimately, Yahoo did not sell, but Icahn received three board seats, one of which he took.
Just 3 years later, in 2011, Dan Loeb of Third Point smelled opportunity. The company's core business had continued to decline, but Alibaba had taken off, with Dan pegging the company's value at $25bn (meaning Yahoo!'s 40% stake would be worth an estimated $7bn after-taxes). And Dan estimated it could further double over the next two years. In fact, he highlighted that there was "more upside potential in the Alibaba stake than the downside potential in core Yahoo!" After penning several letters, he joined the board. Within a year of joining the board, Yahoo! sold half of their Alibaba stake for ~$7bn and hired Marissa Mayer.
Despite the value unlock from new leadership and an influx of capital from the Alibaba sale, Yahoo!'s core businesses were still in decline. And once again, activists were swirling. Jeff Smith of Starboard sent management a letter asking them to narrow their focus, cut costs and switch search providers. Two months after Jeff's letter, Eric Jackson (then of Spring Owl, now EMJ) released a 99 slide deck airing his grievances with the company. Ultimately, Yahoo! added 4 of Starboard's independent directors (including Jeff) to the board. Within a year of Jeff joining the board, Yahoo! sold itself to Verizon.
After Verizon acquired Yahoo!, they merged it with AOL into a company called Oath (later rebranded to Verizon Media). But after a few years of operation, Verizon decided it was time to move on, and sold the combined asset (AOL and Yahoo!) to Apollo.
Apollo's co-head of private equity, David Sambur, who had looked at acquiring Yahoo! in 2017 before it was acquired by Verizon, stepped up. At the time, they were the only financial interested in the company. Since closing the deal, Yahoo! has operated as a standalone business under Apollo, and Apollo has focused on refocusing the business, monetizing their existing assets, and growing the businesses.

David Sambur is a Partner and Co-Head of Private Equity at Apollo, where he oversees the Firm’s private equity strategy and team, and has led numerous investments across technology, media, gaming, hospitality and travel. He currently serves on the board of directors for ClubCorp, Hilton Grand Vacations, Lottomatica, Rackspace Technology, Shutterfly, the Venetian Resort and Yahoo!, among others. Prior to joining Apollo in 2004, David was a member of the Leveraged Finance Group of Salomon Smith Barney Inc.

Ted Seides is the founder of Capital Allocators, an ecosystem that includes podcasts, gatherings and advisory, and has been recognized as one of the top institutional investing podcasts. Prior to Capital Allocators, Ted was the cofounder of Protege Partners, a multi-billion dollar alternative investment management firm that invested in and seeded small hedge funds, where he served as President and Co-Chief Investment Officer. He is perhaps best known for a bet he made with Warren Buffett while he was here that pitted the 10-year performance of the S&P500 against a selection of five hedge fund of funds from 2008-2017. Buffett won. Prior to Protege Partners, Ted had stints at Brahman Capital, Stonebridge Partners, and JH Whitney & Company. He started his career with David Swensen at the Yale Endowment.

(Transcription and any errors are mine.)

Relevant Resources
Compilations
Yahoo!: A Decade of Activism - Yahoo! Activists Compilation (187 pages)
Deep Dives
Meta Platforms Deep Dive (Full report: 166 pages)
Meta Platforms Business History (~18 pages)
Letters
Letter #66: Pony Ma (2021) - Consumer, Business, and Society — The CBS Trinity
Letter #77: Mark Zuckerberg (2012) - Facebook S-1 Shareholder Letter
Letter #83: Evan Spiegel (2014) - Financing, Hiring, FB, Lightspeed, and an All Hands
Letter #96: Larry Page and Sergey Brin (2004) - An Owner’s Manual
Letter #113: Allen Zhang (2019) - What is WeChat’s Dream?

Transcript

Ted Seides: David, thanks for joining me.

David Sambur: My pleasure.

Ted Seides: Before we dive into Yahoo, why don't you give a little elevator pitch on Apollo?

David Sambur: Sure. So Apollo is one of the world's leading alternative asset managers. We're a publicly traded company. We operate in several businesses, but they're all tied together in that they're alternative investments to publicly traded assets, predominantly in credit, and in equity, I co-run our private equity business, which is what most people think of when they think of Apollo. But in fact, the vast majority of our assets are in other products. Credit, predominantly. We have a large retirement services business as well. That's called the Athene.

Ted Seides: How would you describe the private equity investing style of Apollo today?

David Sambur: Our style today is essentially, from a big picture, the same as the style it was initially. And I think it's a very different style than many other practitioners in the industry. What we like to say is purchase price matters, which sounds trite because I think the cardinal rule of investing is supposed to be buy low and sell high. And it also oversimplifies things a little bit, because what we really focus on is superior risk-adjusted returns and superior risk-reward. So a tremendous amount of our time is focused on sourcing the right assets, and structuring the deals appropriately. There's three phases to a private equity deal: there's the buy, the ownership phase, which is the longest portion of the deal, and then the exit. But our secret sauce really is in the first phase. There's a lot we do to systematically add value to portfolio companies. And we're getting really sophisticated around exiting them as well, which adds value. But the sourcing, the front end, is really what Apollo is known for. And I think in the deal we're going to talk about today, I think that comes through very clearly. It's buying misunderstood assets, diamonds in the rough, and buffing them up. I like to say we buy complexity, sell simplicity. But it's really going where other people are less focused, and in doing so, getting value on the buy.

Ted Seides: Well, let's dive into Yahoo. Certainly a brand that people are familiar with. What's the company today?

David Sambur: So the company today is still one of the largest Internet properties not only in America, but in the world. To rewind the tape a second, Yahoo is what the company is called. It actually is not just Yahoo. It's Yahoo and AOL. So for those of you that are asking, What are these guys doing? Why is this a good deal? At the peak, these companies were worth a combined $350 billion, a little over 20 years ago, at the peak of the dotcom bubble. Really what Yahoo is, is a collection of online assets. We call them the O&O businesses: Mail, Homepage, Search, Finance, and Sports, that have large audiences, about 900 million monthly active users still, across all of our properties, which is tremendously large, and a business that is growing, and produces real profits.

Ted Seides: What are the economics of that look like?

David Sambur: The main revenue generating businesses: Mail, Homepage, Search, Finance, and Sports. Yahoo also has a fairly large advertising technology business, that we've already sold two of the four pieces that exist in that business. It has AOL, which is part of a division called Membership Services. Just to focus on that, because I know it gets a lot of attention, it's not the old AOL dial up business that you think of. It's surprisingly a very profitable business. It's mainly membership services for folks around identity solutions and tech support and things like that. Services that people want that own technology in the home, but aren't necessarily technologically inclined. It's actually a good business, growing business, believe it or not. The rest of the Yahoo properties, it's over 5 billion in revenue, overall, for those businesses, and the profitability is over a billion.

Ted Seides: Is that primarily advertising on those properties?

David Sambur: So the main way the business generates revenue is through advertising. And there are long term shifts that Yahoo benefits from, from the shift from traditional advertising to digital advertising. If you think about the world of data and audience capture. Yahoo, as I said, a 19 million user base, still has one of the largest first party data sources in the internet, which is becoming more and more valuable due to the changes in the way that advertising is done online. But currently, it's mostly an advertising-based business.

Ted Seides: As you started thinking about this business, what was the history of the ownership?

David Sambur: I'll go back to when we got involved if you want. This is not an atypical story. So for many of the deals that we've done, it could be a five year story, it could be a 10 year story. And then obviously, by definition, many of our relationships wind up with no deals. Our involvement with Yahoo got started in 2017. So in 2017, Yahoo was still a public company, they owned Yahoo, and then they owned a 40% stake in Alibaba. And Yahoo had come under activist assault to spin off the Alibaba stake and unlock value for shareholders, and that's in fact what they did. And then they were left with a very small company versus the size of the Alibaba stake, which was massively larger than the owned and operated businesses that were still left in Yahoo at the point in time. Myself and a team of folks from Apollo looked at buying the company in 2017. It was placed up for sale, they had hired banking advisors, and it was a structured sales process, an auction process, and we were positioning to buy the business. It was effectively going to be what I would call a restructuring, not in the sense of a financial restructuring, but it's a business that had been a long term decline and the idea was to buy it at a reasonable price and then to basically work through the portfolio of assets, streamline the businesses. But at the time, Verizon had bought AOL, and if you remember, at the time, it seems so funny, because all these businesses went in one direction then went in the other direction, Verizon had bought AOL, and Verizon was making a play in digital media. And we knew at the time that if Verizon wanted to buy Yahoo as well, and there were rumors that they were going to put these assets together to get synergies, we wouldn't be competitive. And that's exactly what happened. Verizon wound up buying AOL, and Yahoo, and putting them together and owning them for several years until we wound up buying it from them. And if you remember, at the time also, AT&T bought Warner Media closely after that. So Verizon made a play in digital media. And then AT&T made a play in traditional media. Both companies since unwound both of those bets. So we didn't do the deal in 2017, but we did a lot of work, and had some familiarity with the business. Verizon got a new CEO, Hans Vestberg, later on, one of the industries I cover, but we have strong relationships with a lot of corporates as telecom. We developed the relationship with Hans, and we were in, telling them that look, you're a $250 billion public company, it doesn't make sense to own this digital media business. There's not a lot of synergies between the digital media business and the traditional cellular phone communications business. You should think about selling it. They weren't ready to do so. And they actually did a good job owning the business. They cleaned up the business, they improved profitability. They were a good owner of the business. In the early days of COVID, we got a phone call from them that they were actually serious about selling the business and they hired advisors, which is fine. It's a very complicated corporate carve out transaction. And if you think about the various ways to buy companies, there's traditional just buying companies that exist in their current form, and then there's carving companies out of corporate parents. One of our strategies in our private equity business is to focus on these very large, complicated corporate carve out transactions, because, by definition, their complexity and their scale limits the buyer universe. And theoretically, there's ways for us to capture value. Plus, they're not zero sum propositions. So, as I'll walk through in a second, we actually wound up partnering with Verizon, and they rolled over a stake in the equity of the deal, which I think they're happy to be our partners with. And there's a lot of ways to create win-wins in these transactions. So they did hire advisors, it was a process, but because of the sheer complexity of the business, and the size of the deal, we wound up buying Yahoo and AOL for about $5 billion. And that works out to about five times EBITDA, to give you a sense of the multiple, that's a low multiple. That's dramatically below the average multiple paid for LBOs. And the reason why it was that price, is because I think there was a lot of uncertainty around the business. For most practitioners in the market. I think most people thought that it was a declining business. It's not. I think this scale and complexity also impacted the value. How much additional cost would we have to add to the business by carving out of Verizon? What would the startup costs be terms of doing that? And I think there was a lot of risks that we were willing to take on as a result of our diligence. And we saw a tremendous opportunity. That's how the deal got done. I remember the night before we signed the transaction, speaking to the banker that was selling it on behalf of Verizon, they had been telling us that it was a very robust auction process. I said, you have to just tell me. Who else was around this? And he said, well, there were some strategics around him. He didn't tell me who, obviously. I said, what about sponsors? They said, well, there was one technology oriented sponsor that took a look. And then after a week, they called us back and they said, This isn't for us. Let Apollo buy it. And literally, that's what he said to me. And that warmed my heart, because it let me know that we were on the right track, that this really is the right type of asset for us to own.

Ted Seides: What was the opportunity?

David Sambur: The opportunity for the new management team, which is led by Jim Lanzone, who's the fantastic CEO that my partner Reed Rayman, who is managing the deal day to day brought in, is to basically grow and diversify the revenue stream. So I do think that you'll see Yahoo... the name of the game is really vertical integration. So step one was get a great CEO, led by Jim Lanzone. Step two is to put great leaders at all of these businesses. So if you think about the portfolio, I mentioned the complexity several times. The real trick in this business wasn't just underwriting Yahoo. That's a bit of a misnomer. It's underwriting Yahoo Finance. It's underwriting Sports and putting a business plan together for Sports. It's underwriting advertising technology, which was losing a lot of money when we bought the business. It was a big risk around the deal. What do we do with this vastly fast growing top line, but extremely cashflow negative advertising technology business? That's not the type of business we're a great owner of. And that was a big part of the deal. How do we get that business to breakeven or profitability and take what we viewed as a liability and turn it into an asset? So step one was Jim. Step two was get great managers of all these businesses. And that's been done. And then step three, is to basically improve monetization. So Yahoo has a very large user base, monetizes at about $3.5-4 per user per annum. Very low monetization rate. Google and Facebook both monetize about $30-35 per annum, respectively. It would be foolhardy to think we're going to get there entirely through advertising. We don't have the same type of advertising that those other two companies offer. It's a very competitive space. But we have a big, large, loyal, sticky user base in verticals like Finance and Sports. And even in our Mail business, which is a fantastic business. The way to improve monetization is by leveraging the user base for products that they want and vertically integrating. So a lot of the investment thesis, the value creation beyond where we are now, to 1.5-2 billion, maybe even more, of EBITDA is through vertical integration. So you can imagine a world where Yahoo Finance, for example, takes its very large user base, which it currently monetizes through advertising, and could vertically integrate into the services that people want to consume when they're in the Yahoo Finance website. So Yahoo Finance is still the number one consumer finance website in the world. Most people check their stock quotes there, but you can't actually do much in there beyond that. So you need to make sure that the user base comes back, and that they're engaged. So that means all the best utility products, all the best news, all the best charting, all the best stock quotes, you name it, ways to track your portfolio. What if you could trade stocks in Yahoo Finance? What if you could do your banking in Yahoo Finance? What if you could get a loan in Yahoo Finance? What if you could do personal finance in Yahoo Finance? And these are all things that the team is working through, trying to figure out what's the best course of action. But the name of the game is going to be getting some penetration of the user base in these much higher value services. You can envision the same thing in sports. So we've got the second largest sports website in America behind ESPN, second largest fantasy sports business, again behind ESPN, I think there's a chance we could be number one. Sports business makes revenue. It's not very profitable, which is surprising to most folks. So in our world of thinking about businesses based on cash flow, sports and finance really didn't drive the valuation of Yahoo. Two of the biggest upsides probably in the business. The opportunity in sports, I think, plays fairly well into our wheelhouse, which is helping the management team improve the product, which they're all over. Jim used to run CBS Interactive, they had a big sports business. Get that fantasy business to be number one and get that user base engaged and really loyal to the product. But the way you could monetize that user base could be through online sports betting. We own the Venetian. We also own other gaming assets. We used to own the second largest sports betting and online gaming business in the UK. We own the largest one in Italy. So we have a lot of relationships and a lot of expertise in this area. It's a clear next step for that business. And then you work down Mail, Search, there's so many amazing ideas.

Ted Seides: How did you think about the rest of the...

David Sambur: The base bare bones of the deal was carve this asset out of Verizon, buy it for a reasonable price. That's no different than almost any deal in our portfolio. And structure it creatively. There was a rollover piece with Verizon where they gave us some subordinated debt financing. It provided us some downside protection, they rolled over into the equity to align interests. There was a plan, based on the structuring of the deal, to sell some noncore assets and derisk our equity. So we paid about $5 billion for Yahoo. Between signing and closing, the deal team announced the deal to sell the Yahoo Japan trademark to a public company in Japan called Z holdings for 1.6 billion. And the royalty stream on that was not a significant contributor to EBITDA, an extremely accretive transaction. And then domain names, IP addresses, real estate, data centers, all were sold. And within the first year of owning the deal, it was about a $2 billion equity check, we returned almost all of our equity. So we stand here today, owning Yahoo, or having an investment in Yahoo, for free, essentially. If you think about it, that really is the magic of the deal up until this point. The true upside's going to be driven by all the amazing stuff that Jim and the team are doing with the business, and M&A. But for us, everything we do at Apollo, it's about don't lose money. If you could create a floor under your equity in every deal, and then your deals are all basically average deals, you have an above average portfolio on a repeatable basis without taking a lot of risk. That's what we do. I think in this deal, it was off the charts successful in terms of us monetizing and returning our equity very quickly. But the idea was built into the original business plan of the investment, which is structure the debt around the cash flowing O&O assets, leave a bunch of assets outside of the debt, so that when those assets are sold, instead of repaying the debt, which is normally what you have to do in these deals, that cash could instead be upstream to the equity. So through dividend distributions, we own the business essentially for no investment. And the funny thing about these deals is, I think if Yahoo could have been sold to the LBO community, as a deal where you lay out $2 billion of capital, wait a year, get the 2 billion back, my sense is there would have been more than one buyer, at the end, willing to buy it. But people didn't have the expertise, they didn't have the vision to structure that deal, and then the experience to execute it. So that's a big part of it, too.

Ted Seides: So when you walk through the initial structure of that deal, how did it get set up so that as you mentioned, you were able to take that 2 billion in sale proceeds and return it to the equity compared to paying down the debt.

David Sambur: So I mentioned it's a portfolio of assets. So the capital structure and the business plan relates to the businesses. Yahoo is many different businesses. We had a view that we could maximize the debt proceeds by leaving some businesses that lost money, namely the advertising technology business, outside of the credit box, where we are getting a loan. But we didn't get a significantly large loan to finance the deal. Banks like that, because they were loaning against the cash flowing assets. The advertising technology business, and a couple of other assets that did produce cash flow, like membership services, and some of these assets that didn't have a lot of cash flow, but we thought had an asset value, were left outside of the bank debt, in negotiation with the banks to finance the deal. And they thought it was beneficial to them. And they knew that we would look to sell those assets to fund the losses at the advertising technology business. So that was the bargain that was struck with them. And then the deal team went to work to basically monetize those assets. We monetize them for values higher than we thought, and we've done a better job working through them. And then the advertising technology business that was losing a significant amount of money, through deals and through good management, has very quickly stabilized. So two of the more interesting things beyond the original structuring of the deal that were accomplished was there were essentially four businesses inside the advertising technology business. There was a content delivery network business, or what's called a CDN, that lost about $80 million. And then there was a supply side business, an SSP, a DSP,and a native business. All lost money. First, the content delivery network business was merged into a public company called Limelight, which was renamed Edgio. And we got back a significant stake in that company that's publicly traded that we currently own. But we own a stake in a public company that has positive values. So we took an asset that arguably was a liability, and turned it into an asset. And then more recently, which I think is even more creative, the company sold one of its advertising technology businesses to a public company called Taboola, which is a very high flying advertising technology business. And it really was a win win win when we merged in our business into Taboola. And this is our business that monetizes the advertising for our owned and operated properties. It doubled the size of Taboola, which was very accretive to them. We took back a 25% equity stake in Taboola, their stock traded up basically 100% since we've signed the deal, and we also improve the monetization, because Taboola simply put, did a better job than we did. In terms of monetizing our advertising, we're getting more cashflow. So a very creative deal. So through all of the dividends plus the public stakes in Edgio and Taboola, we've more than recovered or equity. We own stakes in two public companies, and then we own, still, this portfolio of assets.

Ted Seides: What have you done so far on the O&O assets?

David Sambur: Year one really was about upgrading the management teams, and putting in place the plans. A lot of it was around streamlining operations, making things more efficient. That's all in the rearview mirror. So Jim and the team, I give them credit, the business has a growing top line, but it's undeniable that Yahoo and AOL are a fraction of what they were 20 years ago, let alone 10 years ago, I think it's very hard for businesses that are in that phase of transition to really get ahead of it. The management, the first thing they did was really just get every business scale to where they are, and then position for growth. The second thing is building out all these very detailed product plans like I've talked about. And then there's been just a lot of improvement through revenue growth. Some of that was market based, given the tightness in the online advertising market. But where we are now, a year and a half into it, is really seeing these investments pay off in product. And a lot of the exciting stuff that I'm talking to you about, be introduced to the marketplace, whether it's the refreshed mail product, whether it's the refreshed finance product, which is going to be launched to market soon, whether it's the improvements in homepage, or whether it's improvements in search, even, whether it's improvements in sports. All of those are basically queued up and ready to go. And a lot of that had to be built over the first year, year and a half of the ownership.

Ted Seides: I'm curious what you've seen with the brand as it relates to bringing in the people to make all this happen. You've got a company that's been around for a long time, two companies that were 350 billion, they're now worth a lot less. How does Jim get people excited to come work at Yahoo?

David Sambur: It's a fantastic question. It's something that we actually were asking ourselves when we did the deal. This is amongst one of the most Apollo-esque deals that we've done. But not everything has this history, good and bad. Let's be honest. There's an amazing history, Yahoo and AOL, but there's all the baggage you've talked about. And when you've been on a losing team for so long, it's hard to turn around the culture. The best way to change the culture of the team is change the coach. I would argue the most critical thing was Reed bringing Jim in. Jim is amazing. We've said this before, and we've seen it. But it really is amazing when you see it in action. People want to work for good people, and good CEOs get followership. Within a nine month period, he recruited new heads for almost every single one of our operating businesses. And Jim said, I'm gonna paraphrase what he says, but he said it very well, and then they bring in their people. And before you know it, you wake up a year and a half later, and the first three layers of the organization have turned over. And they've been dramatically upgraded. Even though change is hard for folks, and there's been a lot of change at Yahoo, it's been good change. And there's just this huge level of enthusiasm and excitement that permeates anytime you walk around headquarters. The businesses in growth mode. Undeniably in growth mode, and everyone sees it. We're out with our front foot. And after basically 20 years of essentially managed decline, I want to be careful, because Verizon really did get the business back on track, so I think they're due credit. But it's a standalone business now. It's very clear to everyone. Our goal is to maximize the value of Yahoo. They're going to be given the resources to do it, whether it's the financial resources, whether it's the ownership backing, whether it's the managerial resources. And people see it, people see it in the results. I mean, the results have been tremendous. They're gonna see when we do M&A. The management team all has equity. They see it as we pay these dividends. They participate. So you just go around, and you see it everywhere. But it does start with the management team.

Ted Seides: How do you think about the opportunity for tuck in acquisitions?

David Sambur: The business is four times as profitable now as it was in 2019. And it's almost 100% up on our underwriting case. So 2022 EBITDA was almost 100% higher than what we underwrote 22 when we bought the business. And the business doesn't have a lot of CapEx because it's an online business. That's the beauty of an online business. So it produces a lot of cash. So the business is sitting here today, even after all the dividends, with a significant amount of cash on the balance sheet, in very low leverage, because of the growth in EBITDA, because we started out with not a lot of debt in the first place. So we are on offense. Every one of the GMs that runs each one of those businesses, has a product vision revolving mainly around making sure that we grow the audiences and the audiences are maintained, but then monetizing them vertically. So it's basically buy, build, partner for every one of those businesses. For example, in finance, just to pick out one, let's just say stock trading is something that we thought was an opportunity. Do we buy, do we build, or do we partner? And there's very detailed lists for all these sub sectors, for each one of the businesses, that are being worked through with the Apollo team and the company management team. And I do think you're going to start to see Yahoo do M&A. If you think about it, Yahoo has what a lot of VC funded companies wanted, which is that loyal, engaged user base. If you think about what's happened in online advertising, the economics around adding customers have gotten very upside down. So a lot of companies that relied upon Google or Facebook, or other channels to acquire customers, the cost to acquire customers has gone up quite dramatically over the last three years, and their unit economics have suffered as a consequence. You couple that with the fact that interest rates have spiked, and funding has dried up for many companies that were in growth mode and had never really reached cashflow positive, you have many companies that raised money, previously, in sectors that touch finance, that touch sports, even in digital media, that were former high flying companies, that could be either partnership opportunities or acquisition opportunities, because we solve one of their biggest problems, which is how to get a user base.

Ted Seides: There's been a cleanup exercise, there's been a really interesting monetization of assets to take your equity base out. What is it that you see, that can generate the growth from here, so that it'll turn into such a homerun for you guys?

David Sambur: Where we are now, hopefully I don't jinx it, it will be hard to envision it not being a very solid deal. We returned all of our equity, the business is dramatically more profitable, and I think the multiple should be higher than the multiple that we paid for it. So if you apply any reasonable multiple to the current level of profitability and you pay off the debt, it should be low single digit multiples of the equity that we invested, which is what we underwrite to. If you think about private equity, everyone's focused on 20%+ returns, I think everyone's looking for deals to return, for portfolio to return more than two times. Some deals are better, hopefully less deals are worse. So we're clearly above the average. For this to get into the very high multiples, two things have to happen. And think we feel good about both. It's growing that EBITDA... even if all of the exciting things I talked about don't come to fruition, I think there's line of sight, if you just take our current EBITDA and you roll through the cost structure and the revenues, and you run it out for two or three years at reasonable low growth rates, which I think are lower than we've achieved so far, I think the business gets to a scale when you apply multiple. And now that it's a business that's growing, let's say, low double digits, it should get a multiple that's more in line with internet peers. And if you look across the landscape of internet companies, even after the volatility this year, businesses with those financial characteristic trade at double digit multiples. So you apply double digit multiple to that level of profitability, you pay off the debt, plus you had the one turn for the equity we already received, it could be a very high, large equity check. So when I... not to put it out there too much, but when I think about the deal and the metrics, that's what I think about. How you get there, though, is by the management team continuing to execute, by these businesses continuing to grow, the way they're going to grow business as usual, is just continuing to grow the audience base and improve the advertising. The Home Run upside is if one of these things hits. That's the beauty of this bet. There's 10 different ways to make it to the promised land here. The easy way is generate cash, pay down debt, sell at a higher multiple, which seems like it's going to happen. But if the innovations in Mail hit, huge opportunity. This is the second largest consumer mail business in America, combined Yahoo and AOL, behind Gmail. And the mail business is actually a very profitable business. There's a lot of innovation in mail. If we get it right, huge opportunity in mail. Search. Normally search comes up in these discussions, because everyone thinks about Yahoo when they think about search. Search is a very small part of the profitability pie at Yahoo. Jim has a long history in search. Search was written off by many of the prior seven CEOs. Search was written off, for good reason, because Google took over search. Jim, rightfully so, said, Should we abandon search? The economics of getting 1% market share in search are very large, within the context of this deal. So even in something like search, we're not giving up. And I think there's opportunities in Search. And then any of these things in finance, if one of them hits, the opportunity is huge. That's the beauty of an online business. And that's really the opportunity. The ability to scale quickly, is unrivaled compared to other businesses. If we want to scale the Venetian in Las Vegas, we have to build a new hotel tower. That takes a lot of capital. If you want to scale the Search business, if you have the right product, yes, it requires good product investment and a good team, scales very quickly. Which is why these businesses, when they work well, when they're growing, get very high multiples. Because the returns on capital are so fantastic. The beauty of this bat is it's a very well diversified bet. The base case, I think has been delivered more or less. And the upside case only requires one thing to hit out of let's say 10 or 15 bets.

Ted Seides: When you've had the beginnings of those change all playing out and you got the right people in place, there's game plans, how do you think about the ultimate exit strategy of your investment?

David Sambur: So I mentioned the capital structure follows the business plan. And I think the exit should follow the business plan as well. I think it's unclear exactly what the exit will look like here. But you've already seen us exit two businesses to public companies for significant stakes and public companies. I think you could see more of that with various businesses. You could see us merge certain businesses into public companies for stakes in public companies. You could see a sell businesses for cash, I suppose. Or you could see some corpus of this eventually go public again. And I think that's a bonafide option. If you look at the metrics of this business, the growing user base, and just the ultimate scale of the business, I think it could be a pretty attractive public company. There's synergy across the platform, but I think the old Yahoo really standardized way too much. I've talked many times about Finance, Sports, Homepage. One of our big theses was to push as much down into those businesses because it would lead to more nimbler decision making, better decision making, and I think that's been proven out. It also gives you optionality around an exit. So Finance could be its own public company one day, potentially, if it achieves the scale we think it could achieve. You can easily envision Yahoo Sports being a publicly traded company. If Yahoo Sports is oriented around sports media and online gaming, and you look at other online gaming companies that are out there, I think we could be a formidable competitor. And if you look at the value of some of those companies, that in and of itself, can be a very valuable company. So there's a lot of optionality in the exit.

Ted Seides: I'm kind of curious about some of the larger peers that you've talked about. Google is now owned and parent by Alphabet, Facebook by Meta. And then you have Yahoo, which has this embedded user base, but also is a bit of a state brand. What's the conversation been like about rebranding some of these verticals?

David Sambur: What's funny... the Yahoo brand has tremendous brand awareness, and in the verticals it operates in, I think pretty high satisfaction. So in Yahoo Finance, for example, very high satisfaction. In Yahoo Sports, very high satisfaction. In the Mail business, high satisfaction. People even think about it for Search. I think people most closely associate it with Search than they think about how most people use Google for search. At one point in time, Yahoo was the most visited website on the internet, over 20 years ago. So I think a lot of people are clouded by that experience. But when you actually look at the subsectors where most people are engaging with the business, it's got a very high brand awareness and very high product satisfaction. For the user base, the issue is not the brand, nor does the user base care that these businesses used to be worth $350 billion, then Apollo came along and bought them for 5 billion. The user base just cares about the products that they're getting. There's also a big misperception around the age of the user base. There was this belief that didn't bear out in the diligence, that, Oh, it's an older user, all the young people are using Gmail. We're adding young male users every day. Because what's the use case around mail? When was the last time you signed up for an email address? The use case on mail is you graduate high school or graduate college, you set up a mail account. We're getting our fair share. I love these investments where you couldn't think of an investment where there's more baggage than Yahoo and AOL. And sometimes the baggage is appropriate. Or sometimes, the baggage is appropriately priced, I should say. I think in this case, the baggage was so severe, and the baggage was so well-known that people didn't even bother looking past the cover of the book.

Ted Seides: What's been your biggest lesson learned from this deal?

David Sambur: I've several lessons. Being open minded and not making snap judgments. I think those that made snap judgments missed this opportunity. I think it's another reminder that you need to do the work, and not just listen to what other people are saying. I think another lesson was great management teams really move the needle. Yes, we underwrote Yahoo along the lines of other deals, 20%+ rate of return, we'll make, let's say two and a half to three times our money. And I think that could have been accomplished with a lesser management team. But to make 7, 8, 9, 10 times our money, that's all going to be on the management team. So the management team moves the needle tremendously. This is a technology company. Up until three months ago, or six months ago, before the layoffs happened in the industry, it was incredibly difficult to get talent. There was a huge war for talent in technology. How do you get great engineers, great product people to come to Yahoo? It's because their former boss went there, and they love their boss. And that's basically been the playbook that Jim's executed. I think it's reaffirmed a lot of these lessons in spades, just because of the size of the check, and because of how quickly the needle can move again, in an online business. The pace of change in a business like this is tremendous.

Ted Seides: Alright David, one last question for you. What is your favorite aspect of private equity?

David Sambur: I think an aspect I like a lot, both for the asset class, for investors, but also for me personally, as someone that does this for a living, is just how varied it is. Every day is different, you're always solving problems. We've got tons of companies in our portfolio. I'm learning about an online business, or a casino company, or a chemicals distributor. Your ability to see differences, but also to connect the dots across many different businesses. I can't tell you how many times I've taken something I've learned from an industrial deal that I might have worked on 15 years ago, and applied it to consumer company. It's fun and exciting, just to see so many different businesses, especially at the scale we're operating at now. Doing these large deals for well known companies like Yahoo, but making these businesses better. Apollo has been in business for 33 years. I've been at the firm for 20 years. The industry has grown so tremendously. And we're still doing the same thing we did when we started 33 years ago, focused on downside protected, contrarian investments, and carving out that niche in the market. But the scale that we're operating at has changed so much. And we've built up this 33 year track record of just knowing businesses and knowing how to make them better. Every day we move forward, and just try to get better at what we do. And that's fun and exciting.

Ted Seides: David, thanks so much for sharing this surprisingly fascinating story of Yahoo.

David Sambur: Thanks for having me. It's been a huge pleasure.

Thank you for reading A Letter a Day. This post is public so feel free to share it.

Wrap-up

If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.

If you're a fan of business or technology in general, please check out some of my other projects!

Speedwell Research — Comprehensive research on great public companies including Copart, Constellation Software, Floor & Decor, Meta, RH, interesting new frameworks like the Consumer’s Hierarchy of Preferences (Part 1, Part 2, Part 3), and much more.
Cloud Valley — Easy to read, in-depth biographies that explore the defining moments, investments, and life decisions of investing, business, and tech legends like Dan Loeb, Bob Iger, Steve Jurvetson, and Cyan Banister.
DJY Research — Comprehensive research on publicly-traded Asian companies like Alibaba, Tencent, Nintendo, Sea Limited (FREE SAMPLE), Coupang (FREE SAMPLE), and more.
Compilations — “A national treasure — for every country.”
Memos — A selection of some of my favorite investor memos.
Bookshelves — Your favorite investors’/operators’ favorite books.