Some startling news from Yahoo this morning…
The company is buying $1.1 billion worth of its stock from its largest investor, Third Point, and three of the company’s most important directors–including Third Point’s Dan Loeb–are quitting the board.
This is big news for Yahoo! from a fundamental perspective. The three board members who are resigning, activist investor Dan Loeb, media consultant Michael Wolf, and turnaround expert Harry Wilson, have made a major contribution to Yahoo’s turnaround and stock price resurrection over the past two years.
This also seems like big news from another perspective:
It seems like the very definition of insider trading.
Well, sometime prior to the open of the stock market this morning, three of Yahoo’s most important board members decided to resign.
And, sometime prior to the open of the stock this morning–before the board-member resignations were made public–Yahoo’s largest shareholder, which knew about the resignations, dumped $1.1 billion of stock.
The information that three important board members are quitting is highly material information–information that almost any reasonable investor would want to know when considering a Yahoo trade. Trading while in possession of material non-public information, meanwhile, is insider trading.
Given that Yahoo’s three most important board members just quit, it’s not surprising to see Yahoo’s stock down 4% this morning. It’s actually surprising to me that it’s not down more than that.
Third Point and Yahoo obviously knew that three of Yahoo’s board members were about to quit when they agreed to the terms of the deal in which Yahoo will buy 40 million shares of its stock from Third Point.
Third Point and Yahoo, however, did not wait to agree on a price for this trade until after the news about the board member resignations had been made public.
Third Point and Yahoo did not, for example, wait until the close of trading today, when Yahoo’s stock price will presumably reflect the market’s assessment of the news that Yahoo’s three most important board members have just quit.
Instead, Yahoo and Third Point priced their transaction based on Yahoo’s closing price on Friday–before the news about the directors quitting was made public.
So Third Point is getting the pre-resignation price for its stock, while knowing about the upcoming board member resignations. And the rest of us Joe Schmo Yahoo shareholders, who didn’t know about the resignations, are now getting the post-resignation price.
Again, the definition of “insider trading” is trading while in possession of material non-public information.
It would be extremely hard to argue that the sudden and unexpected resignation of three of Yahoo’s most important directors is not material non-public information.
And it would be impossible to argue that Third Point and Yahoo did not trade while in possession of this information.
So, how is this not insider trading?
I don’t mean to be dense or rude here. And I’m also not a lawyer. So maybe there’s some exception to insider trading laws that allows insider deals like this to happen.
To be clear, I’m also not objecting to big private block trades. Those happen all the time. (In most cases, though, they happen at a discount to the prevailing market price, to account for the likely impact of that amount of stock changing hands on the market price. This one, I note, did not happen at a discount.)
And, very importantly, these big private block trades also do not happen when both parties–and no one else–are in possession of highly material non-public information, such as the resignation of three key directors.
I am sure that this deal was lawyered out the wazoo. So I’m sure there’s some innocent explanation.
But until I hear that explanation, I will be scratching my head.
A source familiar with Third Point’s view of this trade says that it was legal because the stock was sold to Yahoo, not the public. Yahoo was in possession of the same information as Third Point, the source says, so there was no information on one side that was not known to the other side.
And I certainly see that.
As a Yahoo shareholder, I’m a bit annoyed that Yahoo didn’t insist on getting a modest discount to the trading price in exchange for buying such a big block of stock, as I would have expected in this scenario. But I’m not arguing that Yahoo got shafted by being sold stock while not being in possession of the information on the other side of the trade.
The folks I’m arguing on behalf of are Yahoo’s other shareholders, who didn’t sell, didn’t know about this material non-public information that both Yahoo and Third Point had on Friday.
A a Yahoo shareholder who was/is thinking of selling his stock, for example, I can tell you that I sure would have liked to have known on Friday afternoon that Yahoo’s three most important board members were going to quit. That information might have made a difference to me when I was considering selling my stock (which, as it happened, I actually was doing on Friday afternoon. I didn’t sell.) And I certainly feel like a bit of a sucker this morning, now that I have learned that Yahoo’s smartest shareholder, Dan Loeb, unloaded $1.1 billion of his stock on Friday, while knowing what I was I blissfully clueless about all weekend.
DISCLAIMER: I am absurdly conflicted here. First, I’m a Yahoo shareholder. For better and worse, I’ve owned the stock since 1998. (I have been thinking of selling it recently, in part because I’m sick of having to explain that I’m a Yahoo shareholder when I write or talk about the company. It looks like Friday might have been a good time to sell.) Second, I work for Yahoo: I’m a host of a Yahoo Finance video show called Daily Ticker. Third, I have friends and acquaintances at several companies involved in this transaction and many more companies that might have been involved. Basically, I have so many conflicts and potential conflicts with respect to this story that I could spent the rest of the day describing them….
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