Yahoo to Spin Off Its Stake in Alibaba
nytimes.com
nytimes.com
- Yahoo already has 7B in after-tax cash from the sale of a 7% share in Alibaba.
- Yahoo could not just sell more BABA shares, incur a 35% tax just to complete some large acquisition while they already have 10B in cash which is more than the value of their core business.
- They still own 35% of Yahoo Japan and that share is worth another 7B in itself. Yahoo still has tons of assets.
What's interesting is that the market values Yahoo at around 50B at the moment. The BABA spinoff is worth 40B. They have 10B in cash. Their share of Yahoo Japan is 7B. Even before accounting for Yahoo's core business, they should be worth 57B. We're probably looking at an adjustment in their market cap if no legal obstacles to the spinoff are met.
Which suggests (assuming all that is accurate) that the market values Yahoo's "core business" as a $7 billion liability.
http://finance.yahoo.com/news/yahoo-reports-fourth-quarter-f...
http://www.bloombergview.com/articles/2015-01-28/yahoo-would...
It also suggests that at some point, after some time has gone by, Alibaba will find it a no-brainer to buy the spin-out.
"The company’s net income was $166 million, or 17 cents a share, in the fourth quarter, compared with $348 million, or 33 cents a share, in the same quarter a year ago."
How long is the current trend sustainable? Year-over-year losing half their net income! At this point it seems like a simple matter of time.
It still seems like an exceptionally poor way for Yahoo itself to reap the rewards of this long term investment, particularly when it needs to inject some life into its business by spending on talent acquisition or new ventures.
Here's how I think the Alibaba investment breaks down for Yahoo:
Yahoo paid $1bn to Alibaba in 2005. They sold a portion back to Alibaba in 2012 for $4.3bn (after tax), and returned $3.65bn of that to shareholders. Yahoo made $0.65bn after taxes.
They sold more shares during the Alibaba IPO, and made $6.3bn (after tax), with a pledge to return $3.15bn. Yahoo made $3.15bn from the IPO.
Yahoo's remaining stake is now valued at $40bn, which they intend to spin off into another company -- seemingly with no ownership interest for Yahoo (and therefore, no further financial stake).
So over the course of ten years, Yahoo turned $1bn into $3.8bn. A 14.3% APY is nothing to sneeze at, but It sure is a far cry from the $103bn / 58.5% APY they could have had if they retained all of their Alibaba shares today. Even taking 40% off for taxes and a few billion for dividends, that is a lot of walking around town money.
Besides shareholder goodwill and getting Alibaba off their back, I don't see what Yahoo gets of any real value. Yahoo's stock price will collapse when the Alibaba shares are spun off. A company worth $1-10bn has a lot more potential buyers than a $50bn company, and someone will acquire and consume Yahoo shortly thereafter. Unless they announce plans to spin off the Yahoo Japan shares, in which case a potential acquirer just needs to wait to pick them up for a few hundred million after that event.
http://www.nytimes.com/2014/12/21/magazine/what-happened-whe...
This article is helpful in understanding this spinoff. Namely it explains some pretty interesting requirements for this spin-off to happen. The company have to have a function (however lame like Halloween costume rental), and that there can't be any pre-arrangement for Alibaba to buy back the stock before the spin-off, etc.
The other option would have been to sell the Alibaba shares and give the proceeds to shareholders but in that case, they'd have to pay 35% in taxes.
Distributing the Alibaba shares directly to the Yahoo! shareholders would result in them owning Alibaba shares directly.
If they gave out the shares then most shareholders would likely just resell them onto the open market.
However with the spin-off now they have a great little power house to direct and influence Alibaba.
Yahoo's purchase of Tumblr for nearly a billion dollars is a great example. That asset will likely never give Yahoo a return.
Genuinely curious.
http://en.wikipedia.org/wiki/Broadcast.com
Made Mark Cuban some money but it never turned a profit for Yahoo and they don't have anything in that space anymore.
You can look at the entire list here:
http://en.wikipedia.org/wiki/List_of_mergers_and_acquisition...!
A couple of others that stand out: GeoCities, Zimbra (Yahoo bought it for $350 Mil, sold it to VMware for less who sold it down the road as well), etc.
Which was kind of like "PayPal buying eBay" in terms of Yahoo!'s core business, but didn't go far enough.
That's an expensive domain name but the redirect works :P
The value of any business entity with non-zero liabilities is less than the sum of its assets. That's just finance 101.
These assets and liabilities exist all the time, though. In the case of a publicly traded company where the market cap is substantially less than the book value -- concrete assets less concrete liabilities -- there is a judgement that these fuzzy assets and liabilities aggregate to a net liability. That's a sign of perceived distress, but not really rare.
Its even less rare for a company to be valued less than its (concrete) assets -- this is fairly normal. That just means that the net positive goodwill is less than concrete liabilities.
if you did that, you can just go to any stock market and buy any stock. any. without ever even knowing which company they are for. it is the same reasoning. If you think yahoo has 50b in cash because it has stock of other companies valued at 50b, you can just buy 50b of any company and you will have 50b? probably you are going to have 50b-+(market fluctuation) which is what nobody wants to bet on so easily.
only you and icann reason like that :)
This is just my opinion, but if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet. And Warren Buffett should be very thankful!
Didn't Warren Buffet do something similar by trading P&G stock for Duracell stock a while back, thereby avoiding (deferring) capital gains taxes?
Buffett does find creative ways to aviod taxes, but they usually involve the company he owns stock in buying that stock from him in a tax-free exchange. In that case, Buffett exchanged his $3bn worth of P&G stock for $3bn worth of a stake in Duracell. That had allowed him to re-establish his tax basis at the value of Duracel, and avoid cap gains on what he had made on buying P&G earlier.
In short: 0) the spinout will also run some (non-important) businness and so won't be a pure holding company 1) the spinout is less likely to sell the Alibaba shares and squander out the proceeds, 2) eventually Alibaba itself could buy out the spinout, and then it would have no need to sell its own shares.
Surely shareholders would still have to pay capital gain taxes when the spinned-out company gets acquired at a premium, but presumably at a rate better than the 40% Yahoo would have to pay.
Let's say Yahoo were to sell the stock, it would first have to pay corporate tax (35-40%), after which a dividend could be declared (another 15-25% in the hands of the shareholder) The total tax rate as such would be between 45-60% for individual tax payers.
Using SpinCo, Yahoo will not have to pay the corporate tax, and investors will only have to pay capital gains tax because they can directly sell SpinCo shares. I'd assume SpinCo shares to trade at a discount to BABA.
Re-establishing the tax base would have been better, but I think that one is much harder to do.
Another thing to consider is that some non US investors might be holding Yahoo stock through some sort of holding or investment company that can benefit from a participation exemption regime. This means that capital gains are tax exempt at the corporate level, and that no taxation will occur until they make a distribution to shareholders.
Whee.
Yahoo isn't the first to do this; the article mentions a precedent. So, nothing new here.
This should mark the end of Yahoo. I expect to see a merger or buyout soon after this closes.
Selling the stake and incurring 35% corporate tax on an amount that large just to fuel a war chest seems abysmal to do. That would be ~$13.5bn of destroyed shareholder value, and frankly, probably the end of her tenure as CEO.
I can't believe for a second her job is to turn Yahoo around. With hedge funds on the board, I'd assume her job to be to deliver maximum short term shareholder value. They just need a friendly face to do it. Maybe she hasn't realised that yet.
Do Yahoo at this point still even own any interesting assets? Not counting passive investments, such as BABA or Yahoo Japan stock
1. The sheer volume of traffic, available pretty cheaply. While their sites are largely in decline and the focus is still all over the map, I could see their sites carved up among parties interested in a unique views bump (however temporary) -- point news.yahoo.com to Huffington Post, sports.yahoo.com to ESPN, etc.
The brand and site content itself is probably of no real value at this point, with a few notable exceptions like Flickr and Tumblr (and other missing-e sites).
2. All of the user data waiting to be mined. Yahoo Mail has a ton of e-mails sitting around, maybe you'd like to do something with those? Yahoo has been mostly benevolent when it comes to their trove of information, but as an acquisition target this becomes an asset to be exploited. Anyone buying Yahoo isn't buying them to run it as an on-going concern for another 20 years.