Yahoo’s value, as measured by its market cap, has something like doubled since Marissa Mayer took the helm so clearly I must be suffering some terrible brain spasm when I say that she’s destroying value there. However, we have to distinguish between Yahoo the business and Yahoo the company. As I pointed out a month ago, and as Matt Yglesias and Matt Levine have both just noticed, Yahoo the company is valued at less than that company’s stake in the soon to go public Alibaba. This then implies that Yahoo the business – the media company, portal, startup acquisition machine – is valued at (slightly) less than nothing. When we then consider the asset value of the stake in Yahoo Japan, the corporate cash holdings, we end up with a seriously negative valuation of some minus $13 to $15 billion for that business that makes very good profits.
So what’s actually happening here? We can play around with those asset valuations, certainly. It’s not evident that Yahoo could cash out of those two big stakes at current valuations, so there’s some uncertainty built into the price. If they did cash out there could be quite large tax bills to pay. Although there are ways of getting around those. But even if we accept both of those as having some partial impact it’s still true that a profitable business is being valued at less than nothing.
Which is where Mayer’s effect on the company comes in, for that negative value of the business that Mayer is running has been increasing since she’s taken the reins. She doesn’t control the activities of either Alibaba or Yahoo Japan and she didn’t make the decisions to get involved with them. But as their value has changed, Yahoo’s business has been ever more lowly valued by the market. And yes, we can indeed call this value destruction, despite the fact that Yahoo’s market cap has kept rising.
All of which is really a bit of a head-scratcher. How could this be so, especially when there’s about to be that massive payday from selling part of that Alibaba stake in the IPO?
One possible answer is to think of what happened with Vodafone and Verizon. The former owned a large stake in the latter and it was eventually bought out, Verizon buying its own shares (OK, the holding company bought Vodafone’s stake in the jointly-owned operating company) and Vodafone ending up with a very large and greatly appreciated pile of cash. However, there were significant Vodafone investors (ie, significant in having large stakes and also significant in being trusted market thinkers and operators) who would have preferred and argued for Verizon to buy all of Vodafone to get that stake. The reason being that said investors thought that, given a great steaming pile of cash, Vodafone managers would simply waste the money on a series of pretty stupid acquisitions and adventures. As the mooted deal became ever more obvious the Vodafone stock price didn’t react as sharply as one might think it ought to: it really only perked up when the company announced that a substantial portion of the revenues would be passed straight to shareholders rather than kept by management to blow at a late date.
And that’s one of the things that seems to be holding back that Yahoo share price. Yes, the company’s about to get a great deal of cold hard cash. But are they going to spend it on anything that will prove to be of value to shareholders? The obvious conclusion from that significant negative value being applied to the sum total of assets is that people tend to think that it won’t be so wisely spent.
So yes, that is value destruction and it’s happening on Mayer’s watch.
[image via wikimedia]