- Yahoo already has 7B in after-tax cash from the sale of a 7% share in Alibaba.
- Yahoo could not just sell more BABA shares, incur a 35% tax just to complete some large acquisition while they already have 10B in cash which is more than the value of their core business.
- They still own 35% of Yahoo Japan and that share is worth another 7B in itself. Yahoo still has tons of assets.
What's interesting is that the market values Yahoo at around 50B at the moment. The BABA spinoff is worth 40B. They have 10B in cash. Their share of Yahoo Japan is 7B. Even before accounting for Yahoo's core business, they should be worth 57B. We're probably looking at an adjustment in their market cap if no legal obstacles to the spinoff are met.
> What's interesting is that the market values Yahoo at around 50B at the moment. The BABA spinoff is worth 40B. They have 10B in cash. Their share of Yahoo Japan is 7B. Even before accounting for Yahoo's core business, they should be worth 57B.
Which suggests (assuming all that is accurate) that the market values Yahoo's "core business" as a $7 billion liability.
More like the market is expecting them to lose the $10 billion in the bank (spending on money losing core businesses) rather than return money to shareholders.
I think that the core business has an EBITDA of $1,362 million according to their 2014 results. That may be declining but it is still very much a profitable business.
Even if you're careful to short the same notional value, that's not a pairs trade that I would put on. It would open me to upside risk in BABA if YHOO does not perform as well. Correlations change all the time.
I don't think the Alibaba spinoff would be worth $40 billion because it comes with a sizeable tax bill which shareholders will have to pay when they sell their shares.
Matt Levine at Bloomberg (who is awesome) points out that Alibaba will simply buy the spinoff for stock, replacing spin-off shares with plain old Alibaba shares.
Would they avoid the tax hit if its a stock swap? i.e. all stock deal for the acquisition? or buy them in cash in 2016, then the hit is capital gains (lower tax rate)? I'm asking/speculating
Aside from the Alibaba news, which smarter and more capable people here are commenting on, I found this nugget to be really interesting:
"The company’s net income was $166 million, or 17 cents a share, in the fourth quarter, compared with $348 million, or 33 cents a share, in the same quarter a year ago."
How long is the current trend sustainable? Year-over-year losing half their net income! At this point it seems like a simple matter of time.
It is bad, and yet, it isn't. I would give just about anything to own a business throwing off net profits of ~$650 million per year, or half that, or even 10% of that. Many people feel the same way you do - the market currently assigns a negative value to this $650 million annual income - but I think it's not a terrible thing to have coming in.
I can see how this benefits Yahoo's shareholders, and they are after all a publicly traded company.
It still seems like an exceptionally poor way for Yahoo itself to reap the rewards of this long term investment, particularly when it needs to inject some life into its business by spending on talent acquisition or new ventures.
Here's how I think the Alibaba investment breaks down for Yahoo:
Yahoo paid $1bn to Alibaba in 2005. They sold a portion back to Alibaba in 2012 for $4.3bn (after tax), and returned $3.65bn of that to shareholders. Yahoo made $0.65bn after taxes.
They sold more shares during the Alibaba IPO, and made $6.3bn (after tax), with a pledge to return $3.15bn. Yahoo made $3.15bn from the IPO.
Yahoo's remaining stake is now valued at $40bn, which they intend to spin off into another company -- seemingly with no ownership interest for Yahoo (and therefore, no further financial stake).
So over the course of ten years, Yahoo turned $1bn into $3.8bn. A 14.3% APY is nothing to sneeze at, but It sure is a far cry from the $103bn / 58.5% APY they could have had if they retained all of their Alibaba shares today. Even taking 40% off for taxes and a few billion for dividends, that is a lot of walking around town money.
Besides shareholder goodwill and getting Alibaba off their back, I don't see what Yahoo gets of any real value. Yahoo's stock price will collapse when the Alibaba shares are spun off. A company worth $1-10bn has a lot more potential buyers than a $50bn company, and someone will acquire and consume Yahoo shortly thereafter. Unless they announce plans to spin off the Yahoo Japan shares, in which case a potential acquirer just needs to wait to pick them up for a few hundred million after that event.
I agree with your thinking here but I don't think Marrissa had a choice either. Long term thinking if Yahoo wants to stick it out as an independently operating company this move is most likely short sighted, but at this point none of the investors want that. It's pretty clear that a large part of the board no longer believes in Yahoo's potential for success. They just want the money that is tied up in the Alibaba stock so they can move on with other ventures. Marissa's choices were either find a way to put a big chunk of cash in shareholder pockets ASAP or face a hostile board that was going to do it's best to take control of the company and divest the Alibaba stock anyway (you can see that certain characters on the board have been angling for this for a while now). Either way Yahoo probably loses but at least this way she has bought the company time to try and turn the corner and see if her vision can work.
Several have been critical of Marissa's performance. Can you please briefly explain why? Bonus for sharing what you would have safely expected from a Yahoo CEO in two years.
Does anyone know why Yahoo! can't simply distribute its Alibaba shares to the Yahoo! shareholders? I'm assuming it would incur a tax liability of some kind but I haven't seen any explanation or discussion as to why it's not as good an option as the spin-off plan.
It's because the shares are held in a structure called a VIE which is essentially an offshore holding company in the Cayman Islands. By keeping the shares offshore, the shareholders can determine when the shares are repatriated to the U.S. and delaying payment of taxes on the capital gain. For instance, shareholders could wait until they have large capital losses to offset the gains. It's all about giving the shareholders the power to choose when to pay the taxes.
This article is helpful in understanding this spinoff. Namely it explains some pretty interesting requirements for this spin-off to happen. The company have to have a function (however lame like Halloween costume rental), and that there can't be any pre-arrangement for Alibaba to buy back the stock before the spin-off, etc.
So current investors will get stock in Yahoo-Alibaba, a company that exists only to own Alibaba stock, and then they can sell their stock in that new company as if it they owned the Alibaba stock itself?
Yes which sounds stupid until you realize they didn't own "Alibaba stock itself," Yahoo did. Yahoo could've used that money as it wished but activist investors held Mayer's job as ransom, and she just payed in full.
To be fair, the market put such a small premium on the non-Alibaba value in Yahoo largely because they weren't confident that Yahoo wouldn't just squander it.
Yahoo's purchase of Tumblr for nearly a billion dollars is a great example. That asset will likely never give Yahoo a return.
That's because investors look at Yahoo as a holding company, with 3 main components : Alibaba, Yahoo Japan and Yahoo (USA/Rest of World). It's quite normal that the value of the holding company is (far) below the sum of its parts. There are multiple reasons for this discount: assets are less liquid, overhead costs, management risks, taxes, etc.
Most company have intangible assets and/or liabilities whose valuation is less-than-concrete that aren't traditionally reflected on a balance sheet except when they are given a concrete valuation as "goodwill" in the event of acquisition of the company.
These assets and liabilities exist all the time, though. In the case of a publicly traded company where the market cap is substantially less than the book value -- concrete assets less concrete liabilities -- there is a judgement that these fuzzy assets and liabilities aggregate to a net liability. That's a sign of perceived distress, but not really rare.
Its even less rare for a company to be valued less than its (concrete) assets -- this is fairly normal. That just means that the net positive goodwill is less than concrete liabilities.
only if count the assets (i.e. stocks) at face value.
if you did that, you can just go to any stock market and buy any stock. any. without ever even knowing which company they are for. it is the same reasoning. If you think yahoo has 50b in cash because it has stock of other companies valued at 50b, you can just buy 50b of any company and you will have 50b? probably you are going to have 50b-+(market fluctuation) which is what nobody wants to bet on so easily.
it's ironic because technically Yahoo and their acquisitions are sound. Flickr is still one of the best looking photo sites around, and from what I hear from my Photography friends performs like a champ. Tumblr likewise is a good technological investment. I think the failure has been turning good technology into money, which is where a lot of companies fail. The beauty of Flickr and Tumblr are ruined as soon as you start heaping crap tons of banner ads on every page. But that said you still have to find a way to generate revenue from those investments.
A couple of others that stand out: GeoCities, Zimbra (Yahoo bought it for $350 Mil, sold it to VMware for less who sold it down the road as well), etc.
I cannot for the life of me figure out how Yahoo! is making this spinoff tax-free. How can a non-Investment Company spin off an Investment Company? How can this new Investment Company be exempt from diversification rules?
This is just my opinion, but if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet. And Warren Buffett should be very thankful!
I'm not terribly clear on this either, but who exactly will actually have a quantifiable/taxable gain by this demerger? Yahoo the company used to have some Alibaba, and now they will not. Yahoo the shareholders used to have some Yahoo+Alibaba, now they have some Yahoo and some Alibaba. I'm honestly curious, what would be appropriate to tax here?
I'm no tax lawyer and have no clue on the specifics of US tax law, but in many jurisdictions it is relatively easy to do a tax neutral demerger of a subsidiary company from a holding company. You essentially defer the capital gain, up until you liquidate that company/stock.
Didn't Warren Buffet do something similar by trading P&G stock for Duracell stock a while back, thereby avoiding (deferring) capital gains taxes?
So, you would refer to this action being tax-free, but that the owners of the new subsidiary will still owe cap gains from Yahoo's basis if the subsidiary ever sells the Alibaba stake? I don't really consider that to be a tax-free.
Buffett does find creative ways to aviod taxes, but they usually involve the company he owns stock in buying that stock from him in a tax-free exchange. In that case, Buffett exchanged his $3bn worth of P&G stock for $3bn worth of a stake in Duracell. That had allowed him to re-establish his tax basis at the value of Duracel, and avoid cap gains on what he had made on buying P&G earlier.
See the Bloomberg article linked elsewhere in the comments.
In short: 0) the spinout will also run some (non-important) businness and so won't be a pure holding company 1) the spinout is less likely to sell the Alibaba shares and squander out the proceeds, 2) eventually Alibaba itself could buy out the spinout, and then it would have no need to sell its own shares.
Surely shareholders would still have to pay capital gain taxes when the spinned-out company gets acquired at a premium, but presumably at a rate better than the 40% Yahoo would have to pay.
Not tax free, but definitely tax neutral? It also avoids double taxation at the corporate level, so you are saving on the corporate tax. I like the notion of having to pay tax when you actually get your (cash, not paper) return.
Let's say Yahoo were to sell the stock, it would first have to pay corporate tax (35-40%), after which a dividend could be declared (another 15-25% in the hands of the shareholder) The total tax rate as such would be between 45-60% for individual tax payers.
Using SpinCo, Yahoo will not have to pay the corporate tax, and investors will only have to pay capital gains tax because they can directly sell SpinCo shares. I'd assume SpinCo shares to trade at a discount to BABA.
Re-establishing the tax base would have been better, but I think that one is much harder to do.
Another thing to consider is that some non US investors might be holding Yahoo stock through some sort of holding or investment company that can benefit from a participation exemption regime. This means that capital gains are tax exempt at the corporate level, and that no taxation will occur until they make a distribution to shareholders.
> if Yahoo has figured out and easy way for corporations to directly exempt themselves from capital gains taxes, this may be their most significant contribution to the world yet
Yahoo isn't the first to do this; the article mentions a precedent. So, nothing new here.
Isn't she acting in best interests of shareholders in this case? Isn't that why she is there, to create shareholder value? Personally, I think that so far she has wasted a ton of money with little to show for it.
Selling the stake and incurring 35% corporate tax on an amount that large just to fuel a war chest seems abysmal to do. That would be ~$13.5bn of destroyed shareholder value, and frankly, probably the end of her tenure as CEO.
I can't believe for a second her job is to turn Yahoo around. With hedge funds on the board, I'd assume her job to be to deliver maximum short term shareholder value. They just need a friendly face to do it. Maybe she hasn't realised that yet.
I've been waiting for either Alibaba or Softbank to step up and buy them out for months. Now that they're spinning off the Alibaba shares, and given that their core business is currently valued around $0 (by the market), I imagine that Softbank might pick them up for a steal.
Two things come to mind that a potential acquirer might be interested in:
1. The sheer volume of traffic, available pretty cheaply. While their sites are largely in decline and the focus is still all over the map, I could see their sites carved up among parties interested in a unique views bump (however temporary) -- point news.yahoo.com to Huffington Post, sports.yahoo.com to ESPN, etc.
The brand and site content itself is probably of no real value at this point, with a few notable exceptions like Flickr and Tumblr (and other missing-e sites).
2. All of the user data waiting to be mined. Yahoo Mail has a ton of e-mails sitting around, maybe you'd like to do something with those? Yahoo has been mostly benevolent when it comes to their trove of information, but as an acquisition target this becomes an asset to be exploited. Anyone buying Yahoo isn't buying them to run it as an on-going concern for another 20 years.
This is sad on so many levels. Multi-billion tax avoidance, opportunistic shareholders, an over-hyped CEO, and a good Internet company on its twilight.
- Yahoo already has 7B in after-tax cash from the sale of a 7% share in Alibaba.
- Yahoo could not just sell more BABA shares, incur a 35% tax just to complete some large acquisition while they already have 10B in cash which is more than the value of their core business.
- They still own 35% of Yahoo Japan and that share is worth another 7B in itself. Yahoo still has tons of assets.
What's interesting is that the market values Yahoo at around 50B at the moment. The BABA spinoff is worth 40B. They have 10B in cash. Their share of Yahoo Japan is 7B. Even before accounting for Yahoo's core business, they should be worth 57B. We're probably looking at an adjustment in their market cap if no legal obstacles to the spinoff are met.