| |

Tim Worstall Contributor


Opinions expressed by Forbes Contributors are their own.


Contact Tim Worstall


Opinion 3,796 views

Why Is The Market Valuing Yahoo!'s Core Business At Less Than $0?

Yahoo's Yahoo's recent results have turned up something of a puzzle for those of us who believe in efficient and rational markets. For we can clearly see that Yahoo!’s core business is profitable. And we can also clearly see that in the company’s stake in Alibaba and Yahoo Japan Yahoo Japan, that it has assets. Those assets being worth more than the entire value of Yahoo! itself, meaning that that profitable core business is being valued by the market as being worth less than zero dollars, less than $0. Which is, at first sight, an absurdity. One that means that we might need to do some thinking about the efficiency and rationality of markets if we’re not able to find another explanation.

Steve Schaefer here at Forbes highlights the numbers:

SunTrust’s analysts expect the shares sold in the IPO and the value of the remaining position will amount to $29 per share in value to Yahoo, only a shade below the current stock price of $33.75. Add the Yahoo Japan position and the near $4 billion in cash on the company’s balance sheet and Peck, like Foster, figures investors have what amounts to a free call option on Mayer’s turnaround of core Yahoo working.

That’s entirely true but as I’ve mentioned elsewhere we can go a little further than this in our economic reasoning. For a call option is a valuable thing and we don’t expect valuable things to cost nothing in markets. Another way of making the same point is that the markets are placing a value of nothing on that call option and therefore that call option is worth nothing. Which in turn means that the market in general doesn’t think that the Mayer led turnaround of the company is going to succeed.

But even that’s not the final stage of our reasoning. When we add the cash on the balance sheet, the Alibaba and Yahoo! Japan stakes, then compare to the market value of the entire company as of last Wednesday the core business was valued at minus $13 billion. And this is, recall, a core business that is still profitable. So, what we’re really seeing the market think is that those folks at Yahoo! are going to, at some point in the future, destroy that $13 billion of value. That’s the only opinion that allows us to get to that valuation of the company.

At this point we need to speculate a little bit for while we can see the numbers that lead to the above we can’t know exactly why investors think this. But my best guess is that people think that the company will use the cash that it gets to go on an acquisition spree. Some bold, corporation changing, purchases of other companies. And that’s certainly a technique that can work if done right. But I for one would be very worried about Yahoo! doing this. It’s not just that most corporate takeovers are value destroying (most especially for the shareholders of the firm doing the buying) but that Yahoo! would be, if they did this, doing it with cash.

Current tech company valuations are looking very frothy indeed: that’s fine, there might well be a bright future ahead. But other tech companies out there, the Facebooks, Googles, have those heady valuations themselves. So as and when they make a purchase they can do so in their own highly rated stock. That’s a much cheaper tactic than handing over actual real cash for a highly rated company. In a way this reminds me of GEC around the turn of the century. They sold off their boring mainstream electrical businesses and bought companies at the forefront of the then telecoms revolution. Which might have been a great tactic except that they used cash to purchase those highly rated companies. Then at the subsequent slump they went bust. If they’d had their own highly rated stock with which to make the purchases then it wouldn’t have been so painful. And, of course, this whole line of thinking started with the observation that Yahoo!’s stock is not highly rated.

I know that it sounds a little absurd but the current rating the market is giving to Marissa Mayer’s Yahoo! is that while they’re about to get a lot of money from that Alibaba stake, while their assets in total are worth far more than the valuation of the company, the market is assuming that Yahoo! is going to waste some good portion of that money over the coming years.

Post Your Comment

Please or sign up to comment.
