
How Can Yahoo Be Worth Less Than Zero? - foobarqux
http://www.bloombergview.com/articles/2014-04-17/how-can-yahoo-be-worth-less-than-zero
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JumpCrisscross
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.

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nostromo
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
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.

~~~
matthewmacleod
_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.

~~~
dragonwriter
> Yahoo is absolutely massive, and their sites now have more unique desktop
> users than any other web company is the US

Yeah, but having more unique _desktop users_ shows dominance in the modern
online world in way similar to how having the most _equine-propelled vehicle
sales_ does in the modern world of personal transport.

> Seriously, they've something like 800m monthly active users globally, which
> isn't that far off of Facebook.

Facebook has over 1 billion active monthly _on mobile_ , 1.3 billion total.
So, yeah, I'd say that's pretty far off

~~~
erehweb
Many people use desktop at work, and this will likely continue for a while.
Desktop is also often preferred for more complex tasks. Though mobile use is
growing, no evidence that desktop will go way of horse-and-buggy.

------
dragonwriter
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.)

~~~
pyrrhotech
actually, market cap === valuation

~~~
001sky
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.

~~~
JumpCrisscross
Enterprise value is an M&A metric. As an equity holder, equity value is the
valuation of concern. Market cap is generally the best estimator of equity
value.

Takeover value, equity value in the event someone wants to own all (or a
controlling part of) the equity, is a different beast. It includes the
strategic optionality that comes with owning a company. Having to take what
management doles out thus produces a different equity value than takeover
value. Market cap is the best estimate of this passive investor's equity
value.

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penguindev
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.

~~~
bambam12897
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

~~~
prostoalex
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...](http://sacramento.cbslocal.com/2014/04/17/fired-yahoo-coo-
gets-58m-severance-package-for-15-months-of-work/) And that's just US - Yahoo!
has a network of European offices which likely have more protective labor
laws.

~~~
dlubarov
Rather than liquidating the entire company, Yahoo could sell its Yahoo Japan
and Alibaba shares, pay a one-time dividend, and keep its core business
intact. The now-isolated core business would have positive value.

But it might be difficult to acquire a controlling interest in Yahoo without
driving up the price.

~~~
dragonwriter
> Rather than liquidating the entire company, Yahoo could sell its Yahoo Japan
> and Alibaba shares, pay a one-time dividend, and keep its core business
> intact.

Except there is not a lot of reason to believe that either:

1\. Yahoo could dump its holding of Yahoo Japan shares at current market
prices (current share price is a good rough estimate of realizable value if
you aren't trading enough to move the market, but selling off around a third
of Yahoo Japan isn't that small of a block...)

2\. Yahoo could actually find a buyer for its Alibaba holdings (a non-public
firm) at the analyst estimate of its value used in the article.

> The now-isolated core business would have positive value.

The article doesn't really make the case for that. It says the core business
is profitable, but current profitability doesn't mean positive value; it could
be in debt, profitable, and not expected by the market to remain profitable
long enough to get out of debt -- that would give it negative market value.

Really, all the facts in the article tell you is that at least one of the
following is false:

1) The author's implicit assumptions about the market value of Yahoo's core
business, or

2) The estimated value of privately-held Alibaba, or

3) The assumption that realizing the value of its holdings in YJ and Alibaba
would be transaction-cost free for Yahoo (and thus that those holdings should
be undiscounted when aggregate to determine Yahoo's worth), or

4) The efficient market hypothesis.

I have no problem believing that _all four_ are false, and misleading in this
case.

~~~
dlubarov
> > The now-isolated core business would have positive value.

> The article doesn't really make the case for that. It says the core business
> is profitable, but current profitability doesn't mean positive value; it
> could be in debt, profitable, and not expected by the market to remain
> profitable long enough to get out of debt -- that would give it negative
> market value.

Stock can't have negative value. If a company becomes insolvent, its
stockholders aren't forced to pay its debts.

The article agrees: "Unless the probability of that outcome is 100 percent --
a rare thing in this life -- then Core Yahoo should have some positive value."

~~~
dragonwriter
> Stock can't have negative value.

A component of a business can. Ignoring the problems that make marginal stock
prices problematic for overall valuation, and transaction costs, etc., the
stock price of a corporation should be max(0,sum(value of all components of
the business)). The fact that this value should never be less than zero
doesn't mean that no component of the business has a negative contribution.

~~~
dlubarov
I think we're in agreement. I agree that "Core Yahoo" might presently have
negative value, because it could lose money in the future and eat into the
company's other assets.

I'm just saying that if Yahoo sold its major stock assets and transferred most
of its cash to shareholders, the remainder of the company (consisting of "Core
Yahoo" and not much else) would have positive value.

------
nicholas73
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.

~~~
baddox
> 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?

~~~
gcb0
They are both traded overseas, so only billionaires, funds and banks usually
care for those.

~~~
grimlck
Or people who actually live overseas. I hear there is quite a few of them.

~~~
wisty
Alibaba hasn't IPOed yet.

------
danieltillett
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.

~~~
cmsmith
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
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.

------
dpcheng2003
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.

------
ldd-
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

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

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

~~~
throw1234asdf
did you read the article?

~~~
foobarqux
Twice.

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adventured
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.

------
arbuge
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.

------
Retric
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
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.

~~~
tpeng
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...](http://taxdidactic.blogspot.com/2011/10/yahoo-evaluating-cash-rich-
split-ups.html)

------
nroose
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.

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

~~~
throw1234asdf
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.

~~~
clef
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"?

------
spcoll
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.

------
Mikeb85
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
> 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
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).

------
ithinkso
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.

~~~
acabrahams
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
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.

------
whoismua
_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

------
lnanek2
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...

~~~
coldtea
> _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?

