Worstall on Wednesday So here's the little financial markets puzzler of the moment. Alibaba has launched that IPO, the stock has soared and Yahoo! has made a bundle. Jerry Yang's original investment of $1bn now looks like one of the great investment deals of all time. However, as the Alibaba stock price soared (from the $68 of the placing to some $99 at one point in the day), Yahoo!'s price fell: it was 10 per cent down at one point.
Hmm, well, maybe Yahoo! sold all its stock and so don't benefit from that price run? Nope: the web company still has around 16 per cent of the Chinese tat emporium and that's worth some $36bn at these levels. So why in buggery is the Yahoo! price falling?
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But wait! There's more to ponder here: the total market valuation of Yahoo! is less than the sum of its stake in Alibaba and the cash that Yahoo! has on hand (a substantial amount of which arrived on Friday as it sold some of its Alibaba stake).
Of course, anything and everything is worth only what someone will pay for it. So the value of Yahoo! stock is exactly what it says up there on the Big Board*.
But we can still play around and try to find some theoretical value for what the company “should” be worth on the grounds that if there's a mismatch between that market value and the theoretical one, it would be interesting to try to work out why – and possibly even to think about ways to unlock that missing value.
And there certainly is missing value. It depends on how you do the sums, but reasonable estimations are that the core business – that bit that Marissa Mayer actually runs – is being valued at minus $500m or even perhaps minus $11.5bn. The lower number comes from Business Insider, which estimates a figure that supposes Yahoo! ultimately pays taxes on disposals like good little boys. The higher number is from FT Alphaville, which provides the number you'd get without paying taxes. Rightly, probably, as only the little people pay taxes**. And yes, those are both negative numbers – pretty good going for a business that, while not exactly sexy by today's standards, is still throwing off the occasional billion dollars in profits. (By occasionally, I mean every year.)
Worse than worthless
A business can be worth less than nothing: recall that BMW actually paid £500m to be rid of Rover. The accumulated redundancy packages would have cost it more than that if it had simply closed down. And there's always the possibility of some toxic waste pit needing to be cleaned up in an old industrial company. But neither of those are things that are going to apply to an internet company under US employment laws. Which leaves us with this puzzle. Add up what cash Yahoo! has, the value of the Alibaba stake, the part ownership of Yahoo! Japan, and you should have considerably more than the stock market valuation of the whole company. However, that $1bn-a-year generating core business appears to be worth less than nothing: maybe $11.5bn less than nothing.
So what in buggery is going on?
There are a number of technical possibilities here. For example, you can't go short (ie, bet that the price will fall) on an IPO in its first few days or weeks. So, people wanting to do that to Alibaba might be using Yahoo! as a proxy. There are several other such ideas around but they're not terribly persuasive because this valuation of Yahoo! at less than nothing has been going on for months, if not a year or more. Something more basic must be happening.
At this point I recall what a hedge fund manager of my acquaintance told me during the Vodafone/Verizon deal. He really didn't want Verizon to buy itself out from Vodafone, not at all, because he was convinced that the Vodafone management was just so bad that it would waste all the money entirely. As it happened, he was wrong (they gave most of it back to shareholders), but that was the way he was thinking. And that is, I think, what's happening here at Yahoo!. Sure, it has vast wodges of cash, but perhaps the feeling of the markets is that it's just going to piss it away – hence the low valuation despite the huge cash pile.
You might think it impossible to waste that much dosh, but it can be done. Paying cash for the stock of hot tech companies, for example, can be a pretty good way of losing it all. Greybeards around here will recall that that's how GEC went down. It sold off all the defence and operating businesses for cash then used it to purchase the hot telecoms companies. After that, it promptly lost the lot of it.
Until someone comes up with a better explanation, that's the one that I, and a certain number of investors, am going to stick with. However, despite the fact that my City career was brief, inglorious and an archaeological age ago, it does suggest a potential value-enhancing deal for Yahoo! CEO Mayer. Given that people seem to think her firm will just waste the Alibaba money, she should just hand out the stock to Yahoo! shareholders. At current valuations, it would be around and about one Alibaba share for each Yahoo! share. That core business would then, presumably, be valued at something more sensibly related to its profit-making ability (somewhere in the $10bn to $20bn range, say), thus creating up to $30bn of value to shareholders of the company by moving that valuation from the current negative-$11.5bn.
Despite the age of my experience in the industry, I do still recall that bankers traditionally get paid a percentage of the value in a deal. So I'll just get my invoice ready, shall I? Half a per cent of that $30bn sound good to you, Marissa? ®
*Yahoo!'s on Nasdaq, not the NYSE, which is that Big Board but what the hell....
** More accurately, there are just too many ways for a company to dodge such taxation for it to be rationally payable.