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Comment by fsckboy | Hacker News Reader

>Yahoo will own a stake in the new company and will be one of Vespa’s biggest customers for a long time to come.

what's usually going on in scenarios like this is either: the subsidiary is in growth mode and needs access to public capital markets to raise large amounts for building infrastructure (and sharing the expenses with others) to compete, or what has been built is going into profitability mode and the profits are better protected/hoarded in a private company where disclosure requirements are not onerous. If this move represents the former, expect the latter in a few years, is why yahoo would maintain a large stake.

(I'm just pointing this out because there are frequently underlying reasons that have nothing to do with the type of stuff that's in the press release, "successful venture, income/exit event" etc.)

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Cisco has its famous 'Spin-in' strategy.

A "spin-in" is a form of R&D in which a company is the sole investor in a startup. It sends a team of employees off to build an experimental product and then buys that startup for a predetermined and very healthy price.

Cisco has spent on average $763 million to acquire each spin-in that these three men have founded, even though Cisco was also the sole investor in each.

https://www.businessinsider.in/why-cisco-has-showered-these-...

So they take smart people and free them from corporate bullshit by giving them a bunch of money and telling them to do what they do best? I suppose it requires a lot of trust in those individuals, or the takeaway might just be that subjecting your high-performing employees to bureaucracy and bean-counting is not a great strategy.

A company so brilliant it is still below its stock price in the year 2000.

In March 1999, a share of CSCO was worth about $26. At its peak a year later, March 2000, it was worth about $82 (3x increase.) [0]

I don't know about you, but that seems likely to be an excessively inflated figure to me (a la the dot-com bubble.)

Comparing any company's value to its valuation during the dot-com bubble seems silly to me.

[0] https://finance.yahoo.com/chart/CSCO

They're also returning like $6 billion/year to their shareholders via dividends -- if they had just hoarded that cash, their share price would obviously be much higher.

Isn't share price influenced by future dividends? Why would preventing dividends and hoarding cash (reducing expected future earnings of shares) drive up share price?

It’s a bit more complicated than that, it’s also a bit more complicated than what I’m about to say.

Functionally speaking when a company issues a dividend of $x the stock price S will drop to S-x on the ex dividend date. This makes sense as the company now has $x less per share. The shareholder is at a wash as well. They had S before and now they have S-x+x. No value was created, money was simply moved.

Given the above you can more or less value dividends using discounted cash flow. A ~3% dividend is CSCO’s case isn’t worth paying more (increasing the share price over) on its own because the cash used to buy the shares is worth ~5.5% today according to the risk free rate.

In fact if one were considering the dividend alone then the company should be worth less. Obviously factoring in future growth, etc… the market has landed on the current price.

Diab0lic's comment is true about future dividends - but my point is that comparing today's share price to the share price in 2000 and implying they haven't done much misses the fact that they've paid out something like $54 billion in dividends since then.

This will be wrong but true enough to make my point; With a market cap today of ~$215 billion, had CSCO not paid out dividends, their market cap would be $215 billion that represents current cash and the discounted value of future cash + the $54 billion that would also be in cash -- for a total of $269 billion. That's enough to add ~$15 to their share price.

So in buying such a company, do the employees get any ownership and stake?

Or I suspect a third where the Vespa management team would leave and start their own company that would appreciate at a higher rate than yahoo due to greater growth potential.

So yahoo spins them out and has their equity grow faster than yahoo stock, or they lose the product to a new competitor.

There's truth in what you say. I was interpreting (without studying closely) the scale of what's happening to be beyond the scale where ICs have significant leverage, so not the startup venture scale but more like B-C round. It's already clear this stuff's going to be big, and the biggest players have the most advantages, it's time to scale, quit, or pray for a proprietary technological breakthrough. But you're right about giving small equity stake holders a more pure play though equity is an expensive way to pay people.

A third option is very simply about focus. Yahoo experienced this itself under Verizon, wasting years on useless 5G-oriented initiatives, a completely irrelevant focus for Yahoo itself. If the focus of a company's leadership isn't aligned with what benefits a subsection of that company, spin-out is a good way for that subsection to gain an aligned focus without detracting from the parent company's goals.

Vespa's been a technology built with search & ad-serving in mind, while Yahoo's other recent moves have been ad-tech layoffs alongside acquisitions in sports, finance & tech journalism, so the focus shift makes some sense here.

We’re at a moment in history where AI companies (especially ones with proven cashflow like this) are getting almost all the VC money and wild multiples.

It seems like the smart move to spin it out to access this money.

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