On Monday, July 25, 2016, Verizon announced the acquisition of the operations of Yahoo for $4.8 billion. I waited on this post because it really isn’t about Yahoo, but about lessons for closely held business owners and their advisers. In any event, that $4.8 billion value for Yahoo’s operation was a far cry from previous indications of value for Yahoo.
Peak Market Capitalization of $125 Billion
Yahoo was started in 1994 by Jerry Yang and David Filo. By January 2000, Yahoo had a equity market capitalization of about $125 billion, which turned out to be its peak. It has been said that Yahoo is a company that never really defined itself. Think of Google/Alphabet and think of search. Think of EBay and think of auction. Think of Yahoo and I don’t know what to think. Others don’t either. A string of six CEOs was unsuccessful in defining the company’s strategy.
In 2008, Steve Balmer wanted to acquire Yahoo and bid $45 billion, which represented a 62% premium to its then market price. At that time, Yahoo’s 15% investments in Alibaba and its investment in Yahoo Japan were known, but their values were not transparent. The bid reflected significant value for Yahoo’s core operations.
Contrast this with the $37 billion market capitalization of Yahoo following the Verizon announcement on January 25th (and before, give or take a bit). The price two weeks later still reflects a market capitalization of $37 billion.
Since the Microsoft offer in 2008, Alibaba has gone public and has a market capitalization on the order of $200 billion. Yahoo’s 15% stake in Alibaba is worth about $30 billion at the current market price. In addition, Yahoo owns a stake in Yahoo Japan that is worth $8-9 billion. Yahoo also has some $5.1 billion of cash (net of debt) on its balance sheet. The implication is that the markets place no value on the operations of Yahoo for which Verizon is paying $4.8 billion – or for that matter, the $5.1 billion of cash. So if the deal closes, Yahoo will have its stakes in Alibaba and Yahoo Japan and about $10 billion in cash.
What About Yahoo Shareholders?
If you were a continuing shareholder in Yahoo, would you like to have had Steve Balmer’s $45 billion offer in 2008, have taken your cash, paid your taxes, and reinvested elsewhere? Or would you rather have your shares in Yahoo today valued at $37 billion (after billions of share repurchases since 2008). You could at least be comforted by the fact that Yahoo repurchased nearly $7 billion in shares since 2008, so you would have a bit larger piece of the remaining Yahoo pie.
And after all, you would be invested in what amounts to an investment holding company with minority stakes in two more successful companies and about $10 billion in cash that will be run by the current management and board of directors. Sound exciting?
The other choice, since Yahoo is a public company, was to have sold shares near the time of the offering to get what you could get, reinvest in something else, and try to forget.
So What’s the Point?
Private companies do not have public markets. Shareholders in closely held and family businesses are dependent on their managements and boards to work for their benefit. Returns come in two forms, dividend yield (say the C-corporation equivalent yield based on beginning value), and share price appreciation. We can add in the effect of share repurchases, but these tend to be infrequent in private companies.
Travis Harms, my colleague at Mercer Capital, just wrote a wonderful white paper titled Corporate Finance in 30 Minutes. After a brief review of the corporate finance fundamentals of risk and return, the paper addresses three critical questions for business owners and boards.
- What’s the most efficient mix of capital? How much equity and how much debt is appropriate? In other words, what is the appropriate capital structure for a business?
- What capital projects merit reinvestment? I tend to call this the investment question or, sometimes, the reinvestment question.
- What mix of return do shareholders desire? Shareholders have expectations regarding dividends or distributions as well as expectations for capital appreciation. In light of shareholder preferences, what is a reasonable mix of dividends (for current returns) and reinvestment (for capital appreciation)?
By the way, I highly recommend that you download Travis’ white paper and read it. Feel free to share it with your colleagues.
Now, back to the point. Shareholders in private companies are, for the most part, “stuck” with their investments in the absence of active markets for their shares. Unlike the shareholders of Yahoo, who had the ability to “walk away” and sell their shares, this is not feasible, at least in the short run. The question is: Is this a good thing or a bad thing? The answer, as with so many questions in life is: It depends.
It depends on how management and the board addresses the three questions in Travis’ paper. It depends on the type of returns (and the form) being generated.
If you are an attorney or other adviser to business owners, let me suggest that you download Corporate Finance in 30 Minutes. The paper is easy to read and you don’t need to have a finance degree to understand.
If you are a business owner or a director of a private business, download Corporate Finance in 30 Minutes. After each section, Travis poses questions for board discussion. These questions will help focus your attention on private company corporate finance. If you address the questions in the paper, you will almost certainly improve relations with other owners.
So what’s the point? Don’t be like Yahoo and forget the basics of business and corporate finance and shareholder relations. Begin with this helpful tool from Travis Harms, Corporate Finance in 30 Minutes.
Share this paper with your friends and colleagues. It is that good!
My two most recent books are available in an Ownership Transition Bundle. The bundle, priced at $35 plus s/h, has been attractive for many business owners, appraisers and attorneys.