Lazy Man and Money

Time to Buy Yahoo Stock?

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Over the weekend, Alibaba announced that it will price its IPO such that the company would have a 160 billion dollar valuation. Many people in the United States might not be familiar with the giant Chinese e-retailer. I’d include myself in that group. In fact, I had no idea how big the company is in China…

… until this morning.

I just read that Alibaba sells more than Amazon and Ebay combined. I suppose it isn’t surprising given the huge Chinese audience, but Amazon and Ebay operate in at least 8000 counties combined (I’m obviously exaggerating).

So what’s with this title about Yahoo, right?

Well, Yahoo owns a quarter of Alibaba’s stock. So when Alibaba goes public it could unlock $40 billion of value for Yahoo. Yahoo has had this ownership stake for a long time, so this isn’t exactly news. Perhaps the ownership was built into the stock. However, when I look at Yahoo’s market capitalization, it appears that the entire company is only worth $40 billion. (Though that could change with this Alibaba news this morning.)

What this appears to mean to me is that investors are getting Yahoo’s business for free. Update: As I’m typing this, I’m reading that Yahoo is going to sell 121.7 million of its Alibaba shares for around $8 billion and retain a 16.3 ownership stake, which by my calculation would be worth another 26 billion. So not really “for free”, but that’s 34 billion of value in Alibaba and cash for a company that appears to be worth 40 billion total.

So the question becomes, is Yahoo worth buying as a $6 billion company? It doesn’t seem like it’s a bad business. The price/earnings ratio at its current market cap is 34. That isn’t super, but it’s not like Twitter’s non-existent one or Amazon’s 900+ one… and those are two pretty good companies themselves. (One can just argue that they are priced expensively.) Those earnings would look amazing for a $6 billion dollar company though… probably bring it to a P/E of around 6. (Note to investing gurus: Please check my math.)

I remember more than decade ago, the CIO of the huge dot-com company I worked for said to buy DoubleClick stock. I wish I remembered the context, because it wasn’t like I had that many conversations with him. It didn’t make any sense as every stock related to the Internet was getting slaughtered… and this company relied on that whole economy. He explained that they were sitting on so much cash, that the company itself was being valued at nothing. I figured the only way I could lose was if they started sinking that cash into the business with a series of poor decisions that didn’t prove valuable. It seemed like it was worth the risk to buy it and hope that things come back. It turned out that way too with the stock performing well and eventually getting bought by Google.

This situation reminds me a little bit of Yahoo. If you get the company “for free” and they don’t make terrible decisions with their money, it has some potential, right?

So what do you think, let me know in the comments.

Lessons From the Microsoft – Yahoo Negotiations

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microhoo.jpgThe recently expired merger offer from Microsoft to Yahoo got me thinking about two things: what went wrong and what can we learn from it. On a lot of levels the merger makes a lot of sense. Microsoft needs to ramp up their search capabilities to compete with Google. Acquiring Yahoo would give them a boost in the right direction. There are a lot of other parts to Yahoo’s business that would also help Microsoft’s cause. So why isn’t Microhoo up and battling against Google today?

Corporate Culture Clash

Nearly ten years ago, I worked for an Internet media/publishing company. We had a rival in the exact same space. It was Coke/Pepsi, McDonalds/Burger King. Each day we woke up and tried to think up with a way to get their readers. I’m sure they did they same for us. One day we woke up and something had changed… their company had acquired us.

How do you think this turned out? If you said disastrously, you’d get the gold star. We resented them. They had most of the high-level execs. Our social capital was destroyed – each employee had to prove themselves to a new boss. And then there was The Big Project… merging the two companies publishing systems. Each engineer knew that they were digging the grave of their job – each line of code written was a small shovel of dirt.

What is different about Yahoo and Microsoft? I don’t see much as they’ve been corporate enemies for too long

Don’t Get Greedy

Sometimes the best offer is the first offer. Yahoo reportedly thought that Microsoft would raise their first offer. Instead of taking the 40% gain and running with it, Yahoo wanted to stick it out for another 10%.

There’s a big myth that you should never take the first offer. That’s bovine excrement. If the first offer is a good one, then you should take it. I’m usually not a big fan of Microsoft, but in this instance they did what I would have done… come with the best offer.

Get it in writing

Yahoo said Microsoft never put it’s $33/share offer in writing. I’m dumbfounded that people who run billion dollar corporations would let this stop them. How difficult is it for Yahoo to say, “That $33/share offer interests us. Could you put it writing and we’ll have our people look it over?” I can’t imagine anything easier.

Every now and again someone approaches me about some business opportunity related to this website. The person often want me to call them. I almost universally reject the invite to speak on the phone. I want a written record (even if it’s e-mail) of any potential business deal. If she/he can’t describe the proposal in an e-mail, it’s not one I would be interested in.

In the end, I think Microsoft and Yahoo could work this out – the deal is not over. However, if they can’t work together at this stage, it can’t bode well for a potentially merged company.