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Per the 1Q 2011 Greenlight Capital investor letter:

 

The Partnerships established a new position in Yahoo! (YHOO) at an average cost of $16.93

per share. The company developed an extraordinary anti-shareholder reputation in recent

years, beginning with its ill-advised decision in early 2008 to turn down Microsoft’s equally

ill-advised (and ill-timed) bid to buy the company for $31 per share. Now, under new

management, YHOO has taken some increasingly shareholder-friendly steps. It has given up

competing with Google in the web search business, a move which is improving free cash flow

by reducing capex and operating expenses. It is using the improved cash flow to step up share

repurchases (the company bought back more than 7% of its outstanding shares in 2010).

YHOO is also taking steps to unlock value from some of its Asian assets in a tax efficient

manner, including its 35% stake in publicly-traded Yahoo Japan.

 

YHOO currently has $3 per share of net cash on its balance sheet and has approximately

another $8 per share of value in its two minority equity stakes of publicly traded companies in

Asia (Yahoo Japan and Alibaba.com). Assigning a conservative valuation (5x current year

EBITDA) implies $18 per share for just the core businesses and the publicly traded securities

and cash. We believe that Yahoo’s most valuable asset is its 40% stake in Alibaba Group’s

still-private holdings, which are separate and distinct from its ownership in the publicly-traded

Alibaba.com, which we are essentially getting for free. Among Alibaba Group’s privately

held Chinese internet assets is a company called Taobao, which is the leading eCommerce

website in China. More merchandise was sold on Taobao last year than on eBay, and

Taobao's merchandise sales are growing 100% annually. We would not be surprised if

YHOO's 40% stake in Alibaba Group alone was ultimately worth YHOO's entire current

market value. YHOO stock ended the quarter at $16.68 per share.

 

Yahoo currently trades at $18.20.

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Interesting idea...

 

Jack Ma was on Charlie Rose sometime last year and made a comment about how he doesn't view shareholders in high regard (because they are the first ones to leave when things go bad.)  It seems rational that yahoo should get compensated, I'm interested in how much or in what terms they get compensated on. If he gives yahoo/softbank a bad deal, it will send a poor precedent for future foreigner investor relations in china.

 

Thanks for the post.

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Although screwing shareholders is often the order of the day no matter what side of the Pacific you are on, when the rule of law seemingly does not protect even a large shareholder...well it does make you wonder about investing in China and companies whose major assets are there.

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have you guys thought about the Jan 2013 $15 calls on this at all? The are trading at $3.65. According to einhorn, the stock is worth about $18 without anything from the alibaba stuff. So, if they get something, that’s just icing on the cake. The alibaba stuff should be out in the open within the next year and a half, I would think. That would be a good catalyst, with a decent margin of safety mixed in for good measure.

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  • 3 months later...

 

http://www.bloomberg.com/news/2011-08-09/yahoo-discount-to-alibaba-means-u-s-web-portal-free-in-takeover-real-m-a.html

 

Using revenue and earnings estimates for 2012, Thornburg’s Zhou said Yahoo’s stakes in each of the Alibaba businesses are worth a combined $11.45 a share, while Yahoo’s 35 percent stake in Yahoo Japan, the Tokyo-based operator of Japan’s most-visited web portal, is valued at $4.50 a share.

 

Add Yahoo’s $2.55 billion in cash and the company may be worth about $18 a share -- without accounting for its U.S. operations, based on Zhou’s sum-of-the-parts analysis, which adjusts for the value of potential taxes and stakes that aren’t immediately transferable.

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Now hopefully they can hire someone with experience in running a holding company type structure, who recognizes the value inherent in Yahoo's asian assets, and has been able to unlock value from asian equity stakes in the past. 

 

If you read my Visteon write up on the Investment Ideas section, you will see that most of their value comes from its Asian subsidiaries Yanfeng & Halla Climate Control.  Visteon however made some good additions to its board of directors by adding two well-known restructuring advisors.  However, Visteon is mostly owned by hedge funds so it was much likely easier to get these guys on the board.  We need a Bill Ackman type activist investor to come in or a private equity bidding war to unlock value here.

 

 

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Wow Carol Bartz has some mouth on her.  Check this article out: http://www.bloomberg.com/news/2011-09-08/fired-yahoo-ceo-bartz-says-directors-doofuses-fortune-reports.html

 

"Carol Bartz, who was fired as Yahoo! Inc.’s chief executive officer this week, said the company’s board “f---ed me over” in an interview with Fortune magazine."

 

"Bartz also said Yahoo’s directors were “spooked by being cast as the worst board in the country” after they were criticized for turning down a deal to sell the company to Microsoft Corp. in 2007, Fortune said. “Now they’re trying to show that they’re not the doofuses that they are,” she said in the magazine article."

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While everyone is focused on Facebook, I believe that the big money in coming months will be made at Yahoo!. This probably sounds totally ridiculous, but if they play their cards right, there is a lot of value to be surfaced here.

 

The current valuation or just below $16 a share, essentially assumes the "old" value of their 43% stake in Alibaba and their 35% stake in Yahoo Japan. It means that you are getting $2 in net cash for free and Yahoo! which is still spining $5 billion a year in revenue and $800 million in EBIT. While I understand that this is a declining business, if you look at the breakdown, you will see that Search is the one in decline while Display and Other are very stable. In any case, I do believe that Yahoo! itself should be worth at least $3 billion or over $2 a share. It has as many users as Facebook after all.

 

I also mentioned the "old" value of the stake in Alibaba because that is what investors seem to use to value Yahoo! or what was mentioned by Yahoo! executives months ago on the private company. With Facebook and other internet ventures valuations racing upward, you would imagine that Alibaba being profitable and showing exponential growth should be valued higher right now. Could easily add a few $ to the current stock price. 

 

So you are getting easily $4 for free, but since there are taxes to be paid on the sale of Alibaba and Yahoo Japan, it is not really free. That is where the cards need to be played right. The company has been exploring a "cash rich split" which allows to eliminate tax due on the sale of these 2 investments. You are basically exchanging the investments for a major portion in cash and some % of other operating assets. What they are going to get if they go that route on the operating side is unknown. There has been speculation about Hulu, Weather Network and other.

 

The other value argument are the patents and being an internet pioneer has brought to them lots of valuable patents. According to some, they could really squeeze Facebook with these patents if they wanted to. They could have done it with Google as well, but instead played nice with a so-so settlement. How many $ per share are these patents worth?

 

The big problem with Yahoo! has been the "want to", but this is changing thanks to Dan Loeb. The guy has not been liked here because of his short involvement with Fairfax and questionable behavior. However, that past tells me that he is willing to do whatever it takes and this bodes well for Yahoo! shareholders. I like tough guys especially when they are facing stubborn and entrenched founders and executives. He may have been instrumental in the resignation of Jerry Yang and hopefully that he will be able to get rid of Chairman Roy Bostock as well.

 

And that brings a big date or February 24 when Yahoo! will need to have done something to calm shareholders or face a revolt. That is the deadline to submit new directors or a proxy fight. The company appears to have been so mis-managed over the past few years it is nuts. First you had the refusal of the Microsoft buyout, then Carol Bartz, followed by poor investments and continued decline in the core business. Lots of value destroyed, lots of unhappy shareholders. The only positive item is one of the best Chinese investment ever or the stake in Alibaba. At least, we can thank Yang for that one if not Yahoo! shares would be in the single digits.

 

So it is an event driven investment. IMO, you have very good protection on the downside with all the monetizable assets. Then you have wrestless shareholders looking for returns with a key date to take action. Even Capital Research and Management who is non activist has raised concerns about Yahoo!'s corporate governance in recent months. With most of the big players going up in value (AAPL, MSFT, FB), you would think that 700 million users and still a profitable business available for nothing would attract some attention in this Facebook era.

 

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The other value argument are the patents and being an internet pioneer has brought to them lots of valuable patents. According to some, they could really squeeze Facebook with these patents if they wanted to. They could have done it with Google as well, but instead played nice with a so-so settlement. How many $ per share are these patents worth?

 

 

Interesting.  What patents are you referring to?  I've yet to hear anyone put a value on YHOO patents.

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This probably sounds totally ridiculous, but if they play their cards right

 

And how many times in their long illustrious history has this happened?  :-)

 

I remember someone sent a link out, I think it was to this board, it was of a long list of acquisitions that they made, and how they had ended.  It was a the longest list of multi-million to zero lists I had ever seen...

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The other value argument are the patents and being an internet pioneer has brought to them lots of valuable patents. According to some, they could really squeeze Facebook with these patents if they wanted to. They could have done it with Google as well, but instead played nice with a so-so settlement. How many $ per share are these patents worth?

 

Do you have a $ number on the settlement? It might help to value to patent value.

 

BeerBaron

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http://www.techuser.net/gcoverup.html

 

They received 2.7 million shares of Google. At the time, it was worth only around $270 million, but if they had kept the shares it would be worth $1.6 billion today.

 

It was clear even at the time for an outsider that Google was moving ahead of Yahoo in search. Management was not too clever to sell the shares almost right away with all weekly/monthly data available to them on the industry. Seeing Google strength, they could also have tried to extract more.

 

If you do some search on the net, you will find many articles about their patents. How much it is worth exactly? I have no clue but, they are there and it has to be worth north of 0.

 

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Yahoo Inc will sell as much as half of its 40 percent stake in Chinese e-commerce powerhouse Alibaba Group for $7.1 billion, ending years of fractious talks over how to extract value from its most prized asset. Yahoo also increased its stock buyback authorization by $5 billion to $5.5 billion as a result of the deal but said it might instead opt to distribute some of the proceeds through a dividend.

 

The sale, announced on Monday, gives Yahoo $6.3 billion in cash and up to $800 million of new Alibaba preferred stock. After taxes, Yahoo will clear $4.2 billion.

 

That values Yahoo stake in Alibaba at 8.4 billion around $7 per share. Yahoo 35% stake in Yahoo Japan is mentioned at around $4.5 per share plus $2 per share in net cash. US business almost for free.

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http://finance.yahoo.com/news/yahoo-under-levinsohn-seen-shifting-224801182.html

Industry executives and Yahoo investors said that Levinsohn has few viable alternatives other than reorienting Yahoo around media and advertising.

 

"When you have a turnaround situation, particularly an Internet turnaround situation, there are only a very few ways to solve the puzzle," said current News Corp Chief Digital Officer Jonathan Miller, who co-founded a venture capital firm with his friend Levinsohn six years ago. "In Yahoo's case, some of the slots you might think to take are already taken -- being a leader in the social space is taken, and being No. 1 in search is occupied. They aren't going to be the mobile platform."

 

"One of the things that is open and fits is digital media. I think it's the one (slot) that Yahoo has to occupy, and Ross has the background, the orientation and the skills to take the lead in that category."

Though generic display advertising has lost favor to search-based ads and other more interactive formats, it still generated $12.4 billion in U.S. industry revenue last year and should produce $15.4 billion in 2012, according to eMarketer analyst David Hallerman.

 

Yahoo's share of that has been slipping, however, as advertisers turn to Google, Facebook and others. Hallerman projected that Yahoo's display advertising share would decline to 9.1 percent this year from 10.8 percent in 2011.

 

Video ads are more promising. They made up only 6.3 percent of all U.S. online advertising dollars last year but are growing more than 50 percent yearly.

 

Therein lies the reason Levinsohn has been frantically inking new deals to show original content from ABC News and established Hollywood stars creators such as Tom Hanks and Ben Stiller. Yahoo now claims 21 of the 25 most-watched Web series, and in the first quarter eked out a 1 percent revenue increase, the first year-over-year gain since 2008.

 

"If you think of content creation in a line from the free user-generated stuff to the most expensive, like the Netflix content you pay for, Ross' vision is to move up as high as they can go on free and ad-supported, because scale matters," said one of Yahoo's largest shareholders, who declined to be identified because the investor does not speak publicly on holdings. "I think he's right about that."

 

Yahoo also wants to increase the audience at its other content sites, which include the No. 1 U.S. news, sports and finance pages on the Web.

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Interesting article about Yahoo's 30 Million acquisition of 17-year-old's Summly app.

 

http://www.businessinsider.com/the-17-year-old-yahoo-paid-30-million-did-not-build-his-startups-app-or-invent-its-technology-2013-4

 

They already shut down the app, and the core technology of the app was not developed by (or owned by) this guy. It was created by a company called SRI, which licensed the technology to Summly in exchange for equity.  He also did not even build the app - he paid another company to build it.

 

Basically, they paid $30 million to have a 17-year-old work at Yahoo for a year & 1/2.

 

Doesn't seem like Yahoo did any research on this before plunking down $30 mil.

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Interesting article about Yahoo's 30 Million acquisition of 17-year-old's Summly app.

 

http://www.businessinsider.com/the-17-year-old-yahoo-paid-30-million-did-not-build-his-startups-app-or-invent-its-technology-2013-4

 

They already shut down the app, and the core technology of the app was not developed by (or owned by) this guy. It was created by a company called SRI, which licensed the technology to Summly in exchange for equity.  He also did not even build the app - he paid another company to build it.

 

Basically, they paid $30 million to have a 17-year-old work at Yahoo for a year & 1/2.

 

Doesn't seem like Yahoo did any research on this before plunking down $30 mil.

 

Apparently, Summly has already been integrated into the Yahoo App. Mayer might be on to something because Google did a copycat move and bought a summarization company a few weeks later.

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Does anybody still own YHOO on the board?  It looks like a nice call option on an Alibaba IPO going gangbusters, along with possible additional value from a turnaround by Marissa Meyer.

 

I actually took a look this past weekend because of the Barron's piece a few weeks ago.  It makes a big difference if you value their Alibaba and Yahoo Japan stakes as pretax or post-tax.  I was conservative using the post-tax numbers and got a price range between $24.80 and $31.30 valuing the Alibaba IPO between $50 Billion and $100 Billion and the core business at 10x Adj FCF.  To me it didn't look cheap enough especially because betting on the Alibaba IPO is like buying the current valuations for Amazon, etc but I could definitely see it happening. Plus, I think Mayer could easily make the core business grow and be worth more than 10x FCF. 

 

If you use the pretax numbers instead my range increases to $31 - $41.  I think its more appropriate to use the liquidation value of the stakes (post-tax) but I was actually considering making a thread asking how people handle this situation when a large equity stake makes up a large portion of the enterprise value (PNC / Blackrock comes to mind). 

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