I was sitting in the 2nd row of the Stanford University auditorium when you stunned the crowd by stating your intention to buy Yahoo.
You also surprised us by mentioning that you’re currently living in Silicon Valley for one year in order to “rest and relax” before returning to China. I’m not buying that part.
You arrived here 10 days after Carol Bartz was fired as CEO of Yahoo. In America, we have a word for that type of timing: it’s called “suspicious”.
Let’s be honest. You’re living here for one year to:
- finalise the acquisition of Yahoo, whether it be alongside Silver Lake, DST, Temasek, Andreessen Horowitz, Microsoft, etc.
- Work the media circuit and investor community to lay the groundwork for a massive ($50B+) IPO of Alibaba Group in mid-2012. We’ve written previously about why you’re facing so much pressure to do that in the next 12 months — your largest Chinese competitor 360buy.com, is planning the largest IPO in US history in spring 2012.
Alibaba Expanding into US?
Everyone in Silicon Valley is excited to see you try to turn around Yahoo after acquiring it. Maybe it will be included in the Alibaba Group IPO next year after you and your private equity partners clean house — “Alihoo” (ticker: AHOO) has a nice ring to it.
As you said at Stanford, you want to help Chinese e-commerce “cross the ocean” into America and figure out how to differentiate Alibaba from Amazon and eBay in the US market. Institutional investors will love hearing that on your IPO roadshow. It’s a great story and you are the perfect person to tell it.
Before any of that happens, though, I want to warn you about something: this ain’t China. We have very well-developed shareholder protection laws here, and there are a few that you should consider before making an offer to buy Yahoo.
Yahoo’s stock closed at $18.55 on May 10. The next day, newswires reported on your transfer of Alipay to a Chinese subsidiary owned by you. Yahoo stock instantly nosedived and never recovered before hitting a bottom of $11.09 on August 8. That’s what led to Carol Bartz’s firing, which is what led to your arrival here a few weeks ago. Your Alipay transfer appears to have done direct harm to Yahoo shareholders.
So when you assign a value for Yahoo, don’t use today’s price of $16.20 as the starting point. Instead you should start with $18.55. We’re expecting to see a healthy premium on that figure, especially given the tax advantages your group will realise by not having to sell off Yahoo’s Alibaba Group stake. Also keep in mind:
Bostock’s Incentives — Is Coach K Sweating This One Out?
- Yahoo Chairman Roy Bostock is listed as owning 283,860 stock options in the company’s 2011 Proxy Statement
- The most recent strike price associated with Bostock’s options was listed as $20.13 in the 2006 Proxy Statement () – the company no longer updates that data, but given the average share price during Bostock’s tenure from 2003-2011, the $20.13 figure looks reasonable
- So if a Yahoo sale doesn’t fetch a nice premium to that figure, then Duke University might not be naming any more libraries after Bostock.
109,779,204 Options at Average Strike Price of $22.05
Yahoo’s 2011 Proxy statement lists 109,779,204 total outstanding options under its equity compensation plan. The average weighted exercise price of those is $22.05.
Yang’s $31 Rejection
Jerry Yang would have a lot of explaining to do to shareholders if he agreed to sell Yahoo for anything less than the $31 per share offer he rejected from Microsoft in 2008. Yahoo’s board, and their bankers from Goldman Sachs, concluded that the offer “substantially undervalued Yahoo!”.
And if Yang were part of the buyout group, as has been rumoured, and the price was much less than $31… then law school professors might be able to teach a whole course on the litigation that would arise.
You told the Stanford audience that you have your “fingers crossed” that your offer to acquire Yahoo will be accepted, and that it’s “not a financial issue… it’s a board/political/insider issue.” Last night at the AsiaD conference in Hong Kong, regarding your intention to buy Yahoo, you said “Money is not the problem… we’re waiting for the board’s independent directors to tell us what they want to do.”
That sounds like you’ve already agreed on a price, but that Bostock and the other board members hired Goldman Sachs to conduct a formal auction process just so that this whole thing doesn’t smell like insider/self-dealing by a board member. That was one of the few days of law school when I actually paid attention… a board sets up a committee of “independent directors” to review the information and sign off on the deal.
In that context, the recent flurry of news articles about private equity interest in Yahoo makes much more sense: Bain, KKR, Blackstone, Hellman & Friedman, etc… the list seems to grow by the day. Maybe the whole auction is just a thinly veiled charade to provide cover to the Yahoo board, sort of like when communist governments have elections and everyone gets a vote, even though the winner has already been decided ahead of time.
Book Value = $22.88
- Yahoo’s Alibaba Group stake is currently valued at $10.80 per share, but that’s based on what looks like a lowball tender offer/”liquidity program” to buy back relatively small blocks of stock from Alibaba employees.We don’t yet know how many employees will tender their shares — we’ve spoken informally with secondary market dealers in Hong Kong who say that in the open market, there are very few sellers at that valuation level. And if you want to buy back Yahoo’s 40% Alibaba stake to gain control of the company, there should be a substantial premium associated with that. That’s standard in any deal where control changes hands.
- We don’t yet know how many employees will tender their shares — we’ve spoken informally with secondary market dealers in Hong Kong who say that in the open market, there are very few sellers at that valuation level.
- And if you want to buy back Yahoo’s 40% Alibaba stake to gain control of the company, there should be a substantial premium associated with that. That’s standard in any deal where control changes hands.
- Yahoo holds $2.21 per share in cash and marketable securities.
- Yahoo’s stake in Yahoo Japan is worth $3.25-$4.50 per share depending on tax efficiency – we use the midpoint of $3.87
- Yahoo’s core business will generate approximately $1.20 per share in EBITDA in 2011 — valuing this at 5x EBITDA = $6 per share
That’s $22.88 per share of book value — but in America, takeouts don’t typically get priced at book value. Book value is a floor, not a ceiling. So add in whatever you think is fair for gaining control of Alibaba Group and having the opportunity to build a trans-Pacific internet behemoth that you can sell to US investors in an IPO next year with your reputation fully restored. (as opposed to your reputation being “half burnt”, as you said in your Stanford presentation regarding the fallout from your Alipay transfer).
Enjoy the Bay Area!
Silicon Valley is a great place to live. There are lots of fun places to visit nearby, from Napa to Carmel to Lake Tahoe. I’d hate to see you spend your year here holed up in Santa Clara County Courthouse, giving endless depositions in class action lawsuits filed by Yahoo shareholders whose value was transferred to you via your Alipay manoeuvre and subsequent Yahoo purchase. That’s no way to spend a year in California.