Depending upon how seriously you take the concept of the Wisdom of the Crowds it might be about time for someone to mount up and try a bit of good old asset stripping at Yahoo. The reason being the ever rising valuations being put on that stake Yahoo owns in Alibaba, itself just coming up for an IPO. After all, at the leading edge of those estimates, the actual operating businesses that Yahoo has, ones which turn profits, appear to be valued at less than nothing.
The Wisdom of the Crowds was well explained in James Surowiecki’s book of the same name. It’s originally based upon the observation known as Galton’s Ox. When visitors to a fair were offered the chance to bet a small sum on their guess of the animal’s weight those guesses ranged from the ludicrously low to the outrageously high. But the average of all guesses turned out to be pretty accurate. The same behaviour has been noted in many other instances and it’s one of the foundations of what makes markets work.
However, as we have all noted, markets don’t work perfectly: often because we’re not actually able to make a bet about what our guess might be. Thus we get Robert Shiller, one of last year’s econ Nobelists, insisting that part of the cure for the housing boom and bust is to construct methods by which more people can speculate on house prices. His point being that it’s very difficult to bet on house prices falling, going short in the jargon, meaning that those who think there is an overvaluation have no way of adding their wisdom to that of said crowd.
So far so good: but we do now have betting markets in what the Alibaba price is going to be come the IPO. The average price as calculated by Bloomberg was for an enterprise valuation of some $150 billion. Over at the spread betting markets at IG in London people seem to think it’s going to be more like $250 billion. Now you pays your money and takes your choice on this sort of thing but those betting markets have proved pretty good at predicting pries at the end of the first trading day in the past, notably with Twitter and the Royal Mail (note this is closing prices, not the IPO price, meaning that it includes any Day one pop).
The importance to this for Yahoo is of course that the company owns a substantial stake in Alibaba:
Yahoo’s current market value is just over $39 billion. However, Alibaba has an estimated market value of $153 billion, according to a Bloomberg average of estimates in February. Twenty-four percent of that amount — Yahoo’s share — is $36.7 billion.
The upshot: Markets believe Yahoo is only worth $2.3 billion, even though its annual revenue last year was just under $4.7 billion with before-tax income of $633 million. Except that it gets worse, as Matthew Klein pointed out on Bloomberg. Yahoo also owns 35 percent of Yahoo Japan, whose value is $32.3 billion. Subtract that $11.3 billion and youjare left with a company valued at less than zero.
Pull out the couple of $ billion they have in cash as well and it’s looking very good for any mythical asset stripper. And if Alibaba ends up being worth $250 billion then the numbers are looking even rosier. Just the Alibaba stake alone is worth more than Yahoo’s total valuation. It would rather need gonads of steel plus a very deep wallet to pull it off but it is theoretically possible to buy Yahoo, collect the money from the Alibaba stake and own the rump company for free.
And one reason why the market hasn’t already priced this in. As Shiller points out market prices change by people actually doing something about their beliefs on what price should be. That is, we want someone to arbitrage (or speculate, your choice of words here) and it is the very fact that they buy and sell to do so which changes those market prices. Here the standard method would be to go short Alibaba stock and long Yahoo. If Alibaba falls, making the Yahoo valuation look correct, then you gain on that happening. If Alibaba rises, making Yahoo more valuable, then you collect in that manner. It’s only if the valuations diverge even more that you lose: which is why it’s speculation, not pure arbitrage.
However, Alibaba’s not listed yet so you cannot short it (and you cannot short for the first short period after the IPO either). So the speculation cannot take place, the market isn’t influenced by the actions and the price disparity persists. All because of the absence of a speculative market. Not entirely absent, because those betting markets do now exist but they’re pretty thin and you couldn’t offset any great volume of risk in them.
Better, if you’ve any friendly decabillionaire financiers in your social grouping, to just buy Yahoo in toto perhaps.
[image via wikimedia]