How Can Yahoo Be Worth Less Than Zero?

http://www.bloombergview.com/articles/2014-04-17/how-can-yahoo-be-worth-less-than-zero

by foobarqux • 12 years ago

165 119 12 years ago

The article explores a few theories and none really make sense. The only theory that can explain why Yahoo can be worth $13 billion less than two of its three components is that the market believes that its management is so bad that they are going train wreck the group - the hp effect.

PaulHoule• 12 years ago

It's great, the worst female ceos can destroy value as well as the worst men!

danieltillett2• 12 years ago

I don't think we should be blaming female CEOs here as Yahoo and HP have certainly had more than their fair share of terrible male CEOs.

tdees40• 12 years ago

The discount is presumably also due to the fact that no one in management - least of all Marissa Mayer - has any interest in making Yahoo smaller. Although this would likely be the right thing for the shareholders, it would make their domain (and thus their perceived importance) smaller.

foobarqux4• 12 years ago

The article explains that the whole is less than the sum of its parts because the businesses can potentially leech off each other when they are packaged together as a conglomerate ("the conglomerate discount").

craigyk• 12 years ago

or that the market is stooooopid

coldtea5• 12 years ago

I hear that that's a heresy in some parts of the world that believe in the non-scientific "free market" cargo cult.

cmsmith• 12 years ago

To me this idea conflicts with the fact that they are minority shareholders in the two international components. I'm not sure exactly what the management structure is, but if Alibaba really thought it might be run into the ground by Yahoo it seems that they could do something to kick Yahoo out.

sunir• 12 years ago

The argument is not that Yahoo! will burn Alibaba to the ground. It's that their asset holding in Alibaba will have to be liquidated to make up for losses by Core Yahoo!

That is, they might burn their stake in Alibaba to the ground.

spcoll2• 12 years ago

In the absence of a direct way of arbitraging between YHOO, Alibaba and Yahoo Japan, is it not surprising that the respective valuations of these entities will become disconnected.

The market value of a company does not represent its actual worth. Yahoo is not worth negative 13B.

Retric2• 12 years ago

Yahoo would need to pay taxes on it's gains on the other companies stock before it could return that money to it's shareholders so effectively that stock is worth less than it's stated value. Also, Alibaba is not a public company so there is a fair amount of uncertainty in it's value.

Thus, Yahoo is not worth negative 13 billion.

nappy-doo• 12 years ago

Actually, it doesn't have to. They could do a stock swap with present Yahoo shareholders. They can spin the shares into a separate company, and given those shares to the current share holders. There are plenty of tax advantaged games they could play.

Besides that, taxes are only a problem when you sell. If you look at the Yahoo Japan and Alibaba investments in terms of lookthrough earnings with all earnings held by the companies, the tax hit doesn't matter in the short term.

Retric2• 12 years ago

I am almost positive that does not work, though if you can provide precedent I am all ears. And again, yahoo would be taxed on those earnings before they could return the money to their shareholders.

tpeng• 12 years ago

To qualify as a tax-free spinoff, the parent company must own a controlling stake in the company to be spun. Yahoo does not own a controlling stake in either Y! Japan or Alibaba.

However, there is a tax maneuver being considered, called a "cash rich split off" [0]. Yahoo would do a tax-free swap of its Alibaba shares for a 5-year historic business owned by Alibaba. This historic business can have as much as two-thirds of its assets consisting of cash. Warren Buffett did something similar with his shares in GHC.

One question is why did Yahoo not pursue a cash-rich split off in its 2012 transaction with Ali? I would argue that it's most likely for political reasons. As unfair as it may be, the optics of Jerry Yang and Jack Ma teaming up to deprive the US Treasury of tax revenue is very different from the optics of Warren Buffett and Don Graham doing the exact same thing. I think they might still pursue it, just because that's a lot of money to leave on the table.

[0] http://taxdidactic.blogspot.com/2011/10/yahoo-evaluating-cas...

foobarqux4• 12 years ago

Both of your points are mentioned in the article.

clef2• 12 years ago

Last time I checked years and years ago, yahoo was kind of a search engine/directory. What does it do now?

spcoll2• 12 years ago

As far as I can tell it's now a network of content sites (Tumblr, Flickr, Yahoo Finance, Yahoo Weather, a long site of Yahoo {{content_type}} sites, etc), monetized through targeted advertising.

Their demographics are typically older than average, and therefore easily monetizable through display ads. They seem to be doing quite well.

throw1234asdf2• 12 years ago

From watching a few of Marissa's interviews, it seems Yahoo is (or trying to become) a network providing services that people use daily, with a focus on mobile moving forward.

Weather, news, sports, stocks, email, social networking (Tumblr/Flickr). They are also appear to be trying to get into video and search.

clef2• 12 years ago

Thanks guys for clarifying. So am I right to think that they don't have any "identity" that makes them "yahoo" anymore and they just collect rent from a bunch of properties they acquired? In my mind, google is google (identified primarily by search) microsoft is Microsoft( primarily identified by windows and office) yahoo is? ... Is it like if Facebook abandoned social media altogether and became a simple owner of "stuff"?

dredmorbius• 12 years ago

It's sort of like Computer Associates, but with less cachet.

pbreit• 12 years ago

What are good ways to play this besides just buying the stock? In or out of the money calls? Leaps?

mynegation• 12 years ago

you would need to go long yahoo and go short Yahoo Japan and Alibaba (when it is available). Sort of a reverse merger arbitrage.

foobarqux4• 12 years ago

I don't think there is anything to play. What do you think is the mispricing?

throw1234asdf2• 12 years ago

did you read the article?

dragonwriter6• 12 years ago

The idea that market cap (current marginal stock price × total outstanding shares) is valuation is, well, convenient to get an easy way to calculate a number and call it the overall valuation, but doesn't really hold up.

All this article does is point out that if you use that (flawed) method to value Yahoo, and then use the same method to value Yahoo Japan, and then use even less-reliable means to value the non-public Alibaba, and then subtract the last two from the first, you get an unexpected number.

And even if the assumptions underlying the "negative" valuation of the core business were inassailable, its quite easy to have a business to have a negative $10 billion value. Suppose a business has $11 billion in total liabilities, and $1 billion is total assets. Voila, Owner's Equity is -$10 billion.

And this can still be a profitable company. Obviously, making profits means that profit stream has a value (the current value of the stream of future income), but that doesn't mean that you don't have liabilities that exceed that (and the valuation of that stream is not just based on current profit, but expectation of its future continuation. A company can be profitable but the market can lack confidence that it will continue to be profitable.)

pyrrhotech2• 12 years ago

actually, market cap === valuation

001sky• 12 years ago

FYI, valuation is defined as enterprise value, not market cap. And in general, things like liquidity discounts and control premia also mean market cap is a poor proxy for acual or fungible value, even for the equity. The reason is that the marginal price of the equity is not the average price (in terms of market depth). simply multiplying a market that is 1-2% deep @ p=X x 100% of shares outstanding is flawed from the perspective of suplly and demand. these comments are made by others in the thread elsewhere, but worth repeating.

waps• 12 years ago

Isn't that the efficient market hypothesis ?

Which, when you read it, I'm sure you can come up with 10 counterexamples (obvious counterexample: ponzi schemes). I guess you could call me a disbeliever.

mikeash• 12 years ago

That might technically be what the word means, but the implication is that this is what the company as a whole is worth, and that's not necessarily true.

A stock's price is essentially the first derivative (in calculus terms) of the company's value. Market cap is essentially assuming that the entire thing is linear, by taking the derivative and multiplying it by the total size. Stocks don't behave linearly, so this assumption isn't particularly good.

nicholas733• 12 years ago

No, market cap = # of shares * last traded price. It's what the last bozo believed the value was, which varies widely depending on the bozo. Then you have the bozos who are trying to guess what the other bozos will do. At some point the market cap will be right, but only for an instant.

ramchip2• 12 years ago

Doesn't a company with less assets than liabilities have to enter bankruptcy even if it's profitable? e.g. Mt Gox

Xixi• 12 years ago

You usually enter bankruptcy when you become insolvent, that is to say when you can't pay your bills (it can be the salaries of your employees, a bill from a supplier, debt interests, rent, utility bills, etc.). You can run a profitable business and go bankruptcy because you are out of cash, and nobody agrees to lend you some.

This is not unlikely when you have to pay your suppliers before you collect payments from your customers. And realistically that's the common case, not the exception. This is why cash flow is so important for any business.

pwaring• 12 years ago

Not necessarily. Generally, firms become insolvent if they can't meet their liabilities as they fall due (things get a bit more complicated for regulated firms such as insurers, which also have to worry about solvency ratios). If a firm's current liabilities exceed its current assets (where 'current' is defined as 'to be received/fall due in the next 12 months') then it's likely to be in trouble. Examples of current assets are cash, stock and trade debtors (i.e. other firms you have supplied to on credit), and current liabilities include trade creditors (firms who have supplied you on credit). These contrast with fixed assets and long-term liabilities, which aren't expected to arise for over 12 months (e.g. a 5 year bank loan).

If firms automatically became insolvent when liabilities exceeded assets, then no one would ever be able to start a firm with a bank loan, because from day one the liabilities (loan + interest) would outstrip the assets (cash).

It's also possible for a firm to have assets which exceed liabilities but still be insolvent, for example a property company with large fixed assets but little cash in the bank to meet its running costs.

dragonwriter6• 12 years ago

Doesn't a company with less assets than liabilities have to enter bankruptcy even if it's profitable?

No. A company is at risk of being forced into involuntary bankruptcy when it cannot meet its current obligations, which is different than having less assets than liabilities; but even when insolvent it doesn't have to enter bankruptcy, though its creditors can force it to do so (and, if it is profitable and expected to remain so, its creditors might not want to force it into bankruptcy, because they may expect the liabilities to be more fully paid, if delayed, if the firm remains in operation vs. bankruptcy.)

dpcheng2003• 12 years ago

Some additional reasons:

Yahoo's different parts cannot be traded and thus have no liquidity. There's a huge liquidity discount associated with that.

If Yahoo were to sell the pieces of Y!Japan, Alibaba, etc. on the open market, it would have to do it a structured and delayed process or else it would flood the market, dropping the respective stocks. More discount.

ithinkso• 12 years ago

On the not so unrelated topic: does anyone know where you could learn 'basic business'? Something like programming languages first-steps tutorials to be able to understand what they actually are talking about.

AJ007• 12 years ago

Read Warren Buffet's biography "The Snowball" first. You could just read business textbooks but if you are starting from zero it will be like reading through an index.

acabrahams• 12 years ago

I use Treehouse for learning web dev and they have a course on business fundamentals e.g. what type of company to incorporate, accounting fundamentals. Haven't tried it yet myself, but their programming stuff has been good so I reckon it would be worth a try. You can get a 2-week free trial to check it out.

johnrob• 12 years ago

For most companies, the value hits zero when the share price hits zero. When a stock drops from $10 to $5, investors see this as "halfway to zero" and adjust. For yahoo, given its valuable holdings, the zero line happens to be somewhere above actual zero (let's just say $10). However, when yahoo drops from $20 to $15 investors are not switching to "halfway to zero" mode.

As simple as it sounds, I think the elevated numbers have allowed the market to go too low. The whole thing is very psychologically driven after all.

adventured• 12 years ago

This isn't even remotely a puzzle.

The cash value of the Alibaba etc. holdings is always going to be discounted some % (often a significant %). The supposed puzzle implies that those assets are valued at max value inside the market cap of Yahoo. They are not, and historically, cash, cash equivalents, or future expected cash value, is always hit with a discount as far as the market cap is concerned. You can see this in action across every type of public company (from Apple to Berkshire).

Investors simply do not put a full value on cash holdings. They prize earnings and growth drastically more than cash on a balance sheet.

penguindev• 12 years ago

You can read about this in Securities Analysis (1940). Basically you don't trust management, so companies can trade for less than liquidation value [edit: and investors don't trust / overlook that a negative subsidiary can be unwound, although that's not technically true in yahoos case if all subs are profitable].

It's really amazing how nothing changes in finance; it's just that memories are short.

ams6110• 12 years ago

Somewhere around 2001 Apple shares were about $12, giving it market cap less than its liquidation value.

dasil0033• 12 years ago

From what I can tell, Apple's low post Steve Jobs return was $12.72 on April 2003. I believe that was the month the iTunes Store launched. Sort of shocking that was their low point after the success of the iMac and the iPod. Investors must have thought the store would go bust like all the other music store attempts before, but man it just goes to show how clueless market analysts (or maybe everyone) are when it comes to tech.

bambam12897• 12 years ago

Wouldn't this just provide an opening for a investment firm to swoop in, buy Yahoo, sell all their assets and cash out?

Because no one is doing that... I'd have to guess there is more going on

vecter• 12 years ago

Liquidity has a cost. Yahoo probably has many illiquid assets, not to mention transaction costs. Plus, who has $37B to throw around?

prostoalex2• 12 years ago

There's likely a bunch of liabilities and break-up fees involved in such liquidation.

Real estate, data center space is likely to be under long-term leases with penalties for early termination.

Personnel layoffs are not a trivial thing either - there are severance costs which in case of upper management can run into tens of millions - http://sacramento.cbslocal.com/2014/04/17/fired-yahoo-coo-ge... And that's just US - Yahoo! has a network of European offices which likely have more protective labor laws.

firebones• 12 years ago

That's what I wondered. Wouldn't they be better Icahn-bait than eBay?

lnanek2• 12 years ago

Yahoo has a pretty bad history with investors, at least with me. I had a ton of options ready for if they sold to Microsoft at the price point Microsoft offered, it was a huge win for share holders, but they didn't do it. I don't think I'll ever trust them to do what is right for the share holders ever again...

coldtea5• 12 years ago

I don't think I'll ever trust them to do what is right for the share holders ever again...

How abou them doing what is right for the company's future?

ldd-• 12 years ago

Basically, the Yahoo valuation builds in some expectation that it will sell its shares in Alibaba and Yahoo Japan, but instead of returning the proceeds to shareholders (fully realizing its value), they will attempt to reinvest in Yahoo and destroy some of the value

nostromo• 12 years ago

The liquidation value of a company only serves as a floor for the value of the company if there's actually a chance that the company will be liquidated (or sold).

Yahoo's board and management have shown that they take a long view on Yahoo and will not liquidate or sell the company. So it's completely logical that the market price of Yahoo be less than the sum of its parts, so long as you think that the value of their businesses will continue to decline.

downandout• 12 years ago

The liquidation value in this case is $13 billion greater than the market cap. They would absolutely be acquired if their market cap weren't $37 billion. There are only a handful of potential acquirers that have that kind of cash/equity, and to them the extra $13 billion - that could vanish in a few bad market days - isn't worth the risk and negative perception that buying Yahoo would likely bring.

In any event, it appears that Yahoo's investment decisions are the the only thing that have saved the company. They should shut down all non-profitable parts of the core company, liquidate most of their of their Alibaba/Yahoo Japan stake, and use the newly empty offices and $50 billion war chest for a private equity/venture firm/hedge fund. They could reassign some of their brightest engineers to write trading algorithms. With $50 billion to play with, and some smart people, they could be throwing off $5-$7+ billion in profits for their shareholders per year.

They've lost the battle for web supremacy. They should recognize their strengths and capitalize on them.

benhamner• 12 years ago

"They could reassign some of their brightest engineers to write trading algorithms."

Unfortunately for that strategy, their last CEO effectively got rid of all their good machine learning guys.

matthewmacleod2• 12 years ago

They've lost the battle for web supremacy. They should recognize their strengths and capitalize on them.

I've already raised this in the previous Yahoo thread, but I don't understand where this perception is coming from. Yahoo is absolutely massive, and their sites now have more unique desktop users than any other web company is the US — Google and Facebook included. If anything, they have won the battle for web supremacy.

They're not that popular in the tech bubble – but there are hundreds of millions of other people in the US who are clearly using Yahoo. Seriously, they've something like 800m monthly active users globally, which isn't that far off of Facebook.

I do think that Yahoo should indeed cut out non-profitable parts of the company, but they I hardly think that's a minority opinion. But they're still consistently profitable as it is, and they have oodles of cash.

They've languished somewhat over the years, and grown a bit fat and lazy. But that's nothing that some refocusing, trimming, restructuring and good management can't fix.

dasil0033• 12 years ago

You sound like Michael Dell in the 90s saying Apple should be liquidated. I'm not saying Yahoo has a second act coming or anything like that, but rather that your armchair analysis ignores the reality of Yahoo's DNA as a company.

Spooky23• 12 years ago

The market misprices things all of the time.

A few years ago, EMC was in a similar situation, where it's stake in VMWare was (and may still be) nominally worth more that the EMC enterprise as a whole. From an investment POV, it means that Yahoo is probably undervalued, and good management can increase the value of the enterprise substantially.

thaumasiotes• 12 years ago

I feel like I might weather a good amount of negative perception for a same-day ROI of over 33% on 37 billion dollars. What am I missing here?

mathattack• 12 years ago

Awesome article by Mr. Levine. I still assume that they're betting that current management will piss away some of the windfall from the 2 stakes that they hold.

An alternative explanation is convenience yield. This happened with 3com and Palm. http://www.nber.org/reporter/winter05/

Mikeb85• 12 years ago

Market cap isn't the value of a company, but rather the value investors place on the shares times outstanding shares.

In Yahoo's case it's priced so cheap because investors aren't betting they'll get a lot of return (dividends and buybacks).

mful• 12 years ago

Market cap isn't the value of a company, but rather the value investors place on the shares times outstanding shares.

What's the difference? (honest question)

My understanding is that, theoretically, share price is intended to reflect expected value of future payouts (dividends) assuming the company lasts forever. In practice, I would think share price is more likely to reflect expected value of future payouts over some fixed time period plus expected time-adjusted price appreciation over that same interval, which seems to be at least as reasonable a method.

What is the (monetary) value of a company other than return to owners?

josephlord• 12 years ago

it is certainly one valuation but there are other measures too. To give an example of one problem with that measure it would imply that when the stock market is volatile that the company value is too when there may be no news or changes in the company prospects so for me it is hard to regard the market cap as a measure of true value (although it does give a quick estimate).

JumpCrisscross2• 12 years ago

In the 1950s and 60s, American capital markets produced conglomerates. These conglomerates offered an unsophisticated investing public pre-packaged diversification. They were also able to leverage their mass to reliably tap the capital markets. Through the 1970s and 80s, the American finance matured. Investors found portfolios better vehicles of diversification than conglomerates. New capital markets negated size as a pre-requisite to financing. The inefficiencies of having unrelated businesses under one roof became a greater liability than any prior advantages. The LBO tigers dismantled the titans.

A similar story seems to be playing out in tech. The dot com bubble scarred a generation of management. These firms hoard cash, disdain debt and covet the reliability size brings. This is not irrational–the technology capital markets are notoriously capricious. LBOs don't work on an equity-rich capital structure where management holds all the voting rights. Perhaps this will bring an alternative to the acid pens of activist investors.

whoismua• 12 years ago

Meaning that Yahoo's actual business -- Yglesias calls it "Tumblr and Flickr and the iOS weather app that I love and all the news sites and the mail and the fantasy sports stuff" -- is worth a negative amount of money

Poor Yahoo! Let me have them for $0 which is a lot more than negative billions.

Of course, Y! Japan and Alibaba cannot be sold without incurring taxes or lowering the price. And they are worth this much, right now. Tomorrow their stock might drop

nicholas733• 12 years ago

The answer is really simple: nobody with billions actually thinks Alibaba and YHJ is worth as much as their share price, and not many common people know about Alibaba and YHJ.

It's the same reason you don't see high flying stocks like FB, LNKD, YELP, etc. actually getting buyout or tender offers for their shares.

In the event of having to sell a large block of shares, all of the share prices will crater, Alibaba included. Prices are set at the margins, so until there is a stampede the stock price will go with the flavor of the month.

Stock price != company value. Nobody will enter a position they can't get out of easily unless there is real worth in holding.

spikels• 12 years ago

There is no Alibaba "share price" - it is a private company.

EDIT: If you disagree with this statement, let me know what the Alibaba "share price" is and where to find it. Good luck!

xerophtye• 12 years ago

It's not publicly traded ATM, but the article hints that it soon will be. But Yahoo has a stake in it, and thus it has "shares" and those shares are worth something, hence it DOES have a "share price".

EDIT: I can see that your parent does not realize (apparently) that Ali baba is not publicly traded

baddox• 12 years ago

The answer is really simple: nobody with billions actually thinks Alibaba and YHJ is worth as much as their share price, and not many common people know about Alibaba and YHJ.

Are you saying that Yahoo Inc.'s share price is heavily determined by billionaires, but Alibaba's and YHJ's share prices are not?

wisty2• 12 years ago

I think Alibaba is private, and its "valuation" is just an analyst's estimate. That estimate could be an old figure, so the article is using inconsistent data.

gcb03• 12 years ago

They are both traded overseas, so only billionaires, funds and banks usually care for those.

nicholas733• 12 years ago

No, prices are set by buyers and sellers obviously. Except in this case, most people are negative on Yahoo but don't know about Alibaba, nor do billionaires who could move the stock believe Yahoo could dispose of Alibaba at reported levels. In fact, Yahoo's stake is bigger than the initial amount of stock the IPO will offer.

This could all change of course.

aaron987• 12 years ago

Stock price != company value. Nobody will enter a position they can't get out of easily unless there is real worth in holding.

This says it all. The price of a stock does not equal the value of the underlying company. Value investors like Warren Buffett make their money by exploiting that difference.

interstitial• 12 years ago

Stock price most certainly equals company value. That's pretty much the definition.

SixSigma• 12 years ago

Value != price

Share price is a gamble on future earnings.

adamlett• 12 years ago

That's pretty much the definition.

Uh, no. Price is what you pay. Value is what you get. People buy stuff when they think the value they get is greater than the price they have to pay.

nroose• 12 years ago

As many have said, this happens often in the stock market. And in other markets. All of these numbers are just numbers on paper, not actual cash in someone's pocket. This is one of the ways Mitt made so much money - buying companies for less than what he could make by selling the pieces or repackaging the whole.

arbuge• 12 years ago

There seems to be a flaw in the article's line of reasoning:

* whatever you think Yahoo is, * a 35 percent stake in a separate but similar publicly traded company called Yahoo Japan

These two have a similar value, presumably. So setting them to different values in the author's valuation equation doesn't really make sense.

If Yahoo! was actually worth less than just the Alibaba stake, that would of course be very significant, since that's not a similar company at all.

How Can Yahoo Be Worth Less Than Zero?

Related Stories