Why I Sold Most of My Yahoo! Position

I have sold 87.5% of my holdings in Yahoo! (YHOO) after having held on to them for over three years. I decided to retain a small portion to ride it out.

I remain confident that the deal will close and Microsoft (MSFT) will end up owning Yahoo! However, while I initially maintained that the deal would likely close at $50B (up from the initial $44.6B), I am now less certain about that price.

As recently as this past weekend, I ran some numbers and did some probability testing and concluded that the realistic downside was -25% and the potential upside would be 25%.

However, markets are changing, and frankly, I have lost all faith in Jerry Yang to honor his fiduciary duty. He cares less about what is good for shareholders and cares more about retaining control of Yahoo!

Why I Sold:

a) MSFT Offer

If we are to take MSFT’s offer literally, then the half-cash, half-stock would in fact be worth some $41B now (I think that is a faulty premise: practically speaking, the deal was always to be $44.6B, but I digress). In other words, while MSFT maintains an incentive to up the bid back to $31/share for the deal to close and proceed smoothly, Yahoo! is not deserving that courtesy with its reaction. It certainly is losing any leverage to ask for more. Why?

b) Lack of Options

In business, you are only as strong as your best option. Yahoo!’s got none. Namely, a merger with AOL or News Corp., or a sale to a private equity firm, are practically impossible. I even suggested a crazy six steps to remain separate from MSFT, but come on folks, that ain’t gonna happen.

As many have pointed out: YHOO’s board should have been proactive seeking partnerships and outright merger talks before the disastrous Q4 2007 earnings. They let their corporate development efforts languish, thought they were above the capital markets and a few days after their lackluster earnings call where I personally lost all faith in Sue Decker and Jerry Yang, MSFT pre-emptively sought to acquire them.

c) Yahoo!’s Q1 2008 Report

Combining these factors, I think that due to the utter lack of alternative options for Yahoo!’s board, then all that Yahoo! can realistically expect is for MSFT to maintain the initial $31/share offer.

Why? It’s the economy, stupid.

In light of the psychological effects of the “recession-rhetoric” and the fact that I suspect Yahoo!’s Q1 will be tepid, the ultimate price won’t go higher than $31. YHOO’s Q1 report will be announced April 22nd. AllThingsD’s Kara Swisher outlines this some more here. Henry Blodget echoes the sentiment, too, and adds:

As Yahoo carefully explores the details of every possible non-Microsoft option, the macro environment–and, likely, Yahoo’s performance–gets worse. If, after Q1, Microsoft decides to pull the bid, Yahoo’s stock will plunge to the high teens. And if that happens, Jerry Yang will be alone in his celebration.

d) Jerry Yang

I think Jerry Yang’s legacy will remain intact: the man co-founded Yahoo! He deserves credit, admiration, respect and a special place in Web lore. However, his legacy as a CEO and financial manager is at best shoddy, and at worst: criminal.

Yang had a chance to go back to MSFT and negotiate a better payday, presumably $50B, maybe more. However, by dragging his heels, issuing a fat severance package and opening up futile talks with AOL (TWX) and News Corp. (NWS), he only strengthened Microsoft’s hand.

Conclusion:

For three years, I remained long on Yahoo.com but short on Yahoo!’s upper management and board. Ultimately, unlike Yang, I am not emotional about this decision:

At about $29/share, with over a month until the April 22nd Q1 earnings report and no real deadline other than July for MSFT to have to appoint new directors, the time value of mone - for me anyway - is greater than that upside. Again, please be clear: I kept 12.5% because there is a chance the bid goes higher, but the fact that I sold so much shows you how confident I am of that.

Adjusting for transaction fees, volatility in currency exchange rates and Dollar-Cost Averaging, I probably made a few dollars, at most. It’s a shame. With real management, Yahoo! is a $100B market cap company.

But frankly, I never invested in the stock market to make millions, for that you should start a company…

But if you believe that you should risk your nest-egg on a too-rich-to-care emotional CEO who is about to lose everything he has spent building in the past decade: you.are.crazy.

I don’t mind leaving my chips on the table if it means cashing in 87.5% of them to fund the operations of the company… but with the upside becoming increasingly small and the downside becoming large (and the timeline dragging out), I advise any sane shareholder to do… what their investment advisor tells them to do (what… you thought I’d be telling you what to do with your money? You must be crazy).

Comments

[Mr. Upside]

I don't think that was a good move on your part. Perhaps you haven't done enough homework when looking at what Yahoo has accomplished since the offer was made. They're changing the way we search on mobile, they're opening up their search platform, they're building an easier-to-use advertising network, they're still buying companies to enhance their current products, and they made the tough decision to lay off 1,000 employees. If Yahoo had completely laid down after the Microsoft proposal then I would have agreed with you 100%.

But that isn't the case here. This is a company that is not laying down. What shareholder wouldn't want to see that?!?! Yahoo has been on a mission these past few months! If anything, I think they're really fighting for their sharholders to show them that they do have what it takes to put the "YAHHH-HOOOOOOO!&... back into Yahoo. I applaud them for going out with a fight. It shows me that Yang has the guts to go out with guns-a-blazin' and to do whatever he can to bring Yahoo back to its glory days.

And as they say, "No guts, no glory".

[streak]

Upside - you are buying into a dream that ended 2 years ago. It is too late to have these initiaives make a difference. The market has moved on and Yahoo did not react in time. Most shareholders simply want the board to maximize shareholders value NOW.

[GKM]

If Jerry Yang wanted to run a not-for-profit company, he should take his billions and go start one. Last I checked Yahoo was supposed to be a for-profit company. This "stuff" they pulled by putting in the poison pill severance packages was the straw for me. I sold.

I hope that Mr. Softy drops their bid price. The market has shown that they over bid in the first place. I still own Mr. Softy so a deal at half the price is still going to be too rich for my blood given the pathetic culture that obviously must exist within the Yahoo organization. Good luck trying to use any of those people to try and build a strong, integrated organization. I'll likely sell Mr. Softy in this short lived advance.

[ED K]

WHEN A STOCK JUMPS 50% AND YOU DON'T TAKE THE INCREASE TO THE BANK I BELIEVE YOU HAVE ERRED ON THE SIDE OF GREED.BY THE TIME A DEAL LIKE THIS CLOSES THE ORIGINAL OFFER COULD DEPRECIATE AND IF THE BUYOUT DOES'NT OCCUR YAHOO COULD BE BACK IN THE TEENS QUICKLY.

[Tom B]

"I remain confident that the deal will close and Microsoft (MSFT) will end up owning Yahoo!"

Then you should have sold ALL your YHOO; you'll end up stuck with non-performing MSFT stock.

Yang is smarter than Ballmer, by a wide margin. I don't know what will happen with the proxy fight, but they rarely succeed. If YHOO prevails, I would not call the company a "buy", but I like them way more than, say, Ebay or AMZN. I'd call them a "hold"-- My Humble Opinion.

[Mr. Upside]

@Ed K...

Greed?? If you had a company that was once at over $100/share and now wants to be bought at $31/share would you sell? That's not greed. That's called not balking at the first offer. Especiailly when you know that your stock was just at $31/share in November.

Do think Google really thinks they are worth $434/share right now after recently being over $700 in Nov.

Do you think Microsoft thinks they are worth $27/share after bing at $37 this past November? Do you think if somebody offered $54/share for Microsoft right now, they would take it? No way.

Yahoo is still #1 by far in display advertising, the #1 trafficked web site in the world (reaching half of all internet users), and they're #1 for messenger, mail, finance, games, news, sports, personals, comparison shopping, and travel. And being #2 in search is not the worst thing when you're still making hundreds of million of dollars. They also own large properties in asia like 40% of Alibaba and Yahoo Japan.

Would you sell on the first offer if you had all of this? C'mon, have you ever negotiated a deal?

[quem]

way too little way too late to be kicking it into higher gear at yahoo...the market and tremendous opportunities have long passed and they will be left always playing catch up now.
The MSFT offer doesn't spell shareholder value, but it is the best to come along in quite some time for folks to cash in.
The layoffs were the biggest joke...laying off the worker bee's who will help you catch up instead of the bumbling vp's who caused all the problems at yahoo, and then give the biggest bummblers bonuses for non-performance...I smell another lawsuit!
Yang smarter than Balmer...are you outta your sick mind? Yang has not executive experience what so freakin ever...he was Chief Yahoo (read between the lines, high pay to play all day) before becoming the annointed CEO...cough(LOSER)!
Alot has been said about culture clashes of Y! and MSFT...its still way better than all the hard work, blood, sweat and tears to be pissed away by wanna be CEO's and hundreds of bumbling vp's.

[WAKEUP]

The culture and the prospects at Yahoo! are completely POISONED, now. It will make anyone who eats (buys) it very sick. Look for Jerry Yang to slip some more, perhaps unseen poison into the company. Reason, logic, and even the love of money are out the window, now. It's personal, for Yang; and when that happens at the top level of any company, I don't want one even paper dollar of my money floating in that toxic soup.

[User 161832]

About the only thing that will stop the merger with Microsoft would be a class action lawsuit filed against Yahoo by individuals who's personal computers have been keylogged by a Yahoo employee, mine for one. This individual tends to think that he can do whatever he wants and this may have been the case in the past but the US Government is now changing these laws and making the penalties more severe, and this Yahoo keylogger will be the first to stand trial under these new rules.

In so far as Yahoo goes, I could care less what happens to them or to their employees. Hopefully when Microsoft takes over, they will eliminate the bad apples from the group and punish those that continue to violate other peoples rights.

[Microwho?]

"However, his legacy as a CEO and financial manager is at best shoddy, and at worst: criminal."

Talking the original offer of $31 without any negotiations, or any time spent exploring all of your options, now that would have been criminal.

[sv_observer]

The irrationality of Mr. Upside and others of his ilk shown by this statement: "If you had a company that was once at over $100/share and now wants to be bought at $31/share would you sell?". In other words, since years ago (at the height of the dot-com bubble) it traded for more than $100 per share, it will always be worth more that $100 per share. I assume he is willing to back up his statement by buying my Yahoo stock at this price.