Daniel Loeb Increases Stake in Yahoo
· Discount to intrinsic value first thing they noticed
· “Core Yahoo” is only small portion of company’s actual value ($2.00 of $14.49 per share)
· After-tax value of Alibaba and Yahoo! Japan is $11 (73%) of its share value
· Remaining $2 per share is net cash
· Central to thesis: Asian asset portfolio (Yahoo owns 40% stake in Alibaba Group, the dominant e-commerce platform in China)
· Alibaba has 49% of B2B e-commerce market, 90% of C2C e-commerce market and 53% of B2C e-commerce market
· Complements these positions with Alipay
· Holds No. 2 share of Chinese online ad market
· Exciting share of China’s rapidly growing B2C market — Taobao Mall
· iResearch says China had 187 million online shoppers in 2011, compared to 170 million in U.S.
· E-Commerce transaction value in China likely to overtake the U.S. by 2015
· Huge e-commerce potential in China
· Alibaba IPO would place it among China’s largest online leaders (Tencent and Baidu)
· UBS’s Makio Inui placed $63 billion value on Alibaba, implying just over $13 per Yahoo share after tax
· Yahoo’s stake worth approximately $7.60 per share after tax, implying Yahoo’s stake grown at compounded rate of $55 per annum since its investment in October 2005
· Media focused on drama while Wall Street neglected underlying Alibaba valuation story
· Not surprising Jack Ma is so interested in repurchasing Yahoo’s stake
Loeb originally bought 48 million shares of Yahoo in the third quarter of 2011 “following a difficult operational and strategic stretch during the waning days of CEO Carol Bartz’s tenure that culminated in a significant sell-off in the shares in August,” he said in his shareholder letter. That quarter marked the company’s fourth quarter of year-over-year declining revenue.
In the first quarter of 2011, Yahoo had quietly disclosed in its quarterly SEC filing that Alibaba group transferred ownership of Alipay, an online payment company, to Alibaba CEO Jack Ma’s new company. The company had added a great deal of value to Yahoo for investors. One researcher estimates its value at $2 billion, with 550 million registered users, compared to PayPal’s 94.4 million at year-end 2010.
This prompted David Einhorn, who had purchased Yahoo based on a “sum of the parts analysis” which placed substantial value on its Chinese assets, to sell his shares. “Shortly after the purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit hived-off a valuable subsidiary into a corporation that he personally controls. From there, the finger pointing started in every direction. This wasn't what we signed up for. We exited with a modest loss,” he wrote in his shareholder letter.
Daniel Loeb, however, has signed up for much more. He has taken a very activist role in the company. His initial 5.2% stake in Yahoo included a 13-D letter and amendment that called for an overhaul of the company’s existing board of directors and offered suggestions for maximizing the company’s value. Loeb also said in his third-quarter letter that since the news made headlines many parties were “interested in the individual businesses and in some cases, the whole of Yahoo.” Interested parties included Google Inc. (GOOG), Microsoft (MSFT), and Alibaba CEO himself, Jack Ma.
Though mention of a buyout was not specifically mentioned, Loeb said in his fourth quarter letter that, “We are glad Yahoo has played a critical role in Alibaba’s early development and hope new leadership at Yahoo can chart a new course for the company’s relationship with Mr. Ma and Alibaba.”
Loeb has been instrumental in other changes at the company since becoming an investor in it. Most of these are documented in his letters the board.
Here is a brief overview of the changes:
· On September 8, he called the board’s appointing of Carol Bartz as CEO a “serious misjudgment.” Bartz was fired on September 6, but Loeb said he could not understand why it took so long.
· On December 13, he described Yahoo Board Chairman Roy Bostock and Founder Jerry Yang’s management as “a history of strategic bungling.” (He called for their resignation in several letters.)
· Yang resigned from the board and all other company positions on January 17. On February 7, Bostock and three other directors agreed to step down.
· However, Loeb disagreed with the company’s two new selections for new board members as they were hand-picked by the current board, which would not allay investor fears or “put it on the right track towards maximizing shareholder value.”
· Instead, on February 14, Loeb nominated himself, Harry J. Wilson, chairman and CEO of MAEVA Group LLC, a corporate turnaround and restructuring boutique; Michael J. Wolf, CEO of Activate Inc., a strategy consulting firm which works with media and entertainment companies; and Jeffrey A. Zucker, former CEO of NBC Universal.
Loeb has offered few other ideas for what Yahoo should do going forward after his new board is installed. But with 36.2% of Third Point’s portfolio invested in the company, he has plenty of motivation to come up with some. With Daniel Loeb on the board and a share price of $14.55, less than his calculated intrinsic value of $19-20, is now the time to invest in Yahoo?
Daniel Loeb’s new purchase of Yahoo was reported on GuruFocus Real Time Picks. See Dan Loeb’s portfolio here.