Yahoo!: Do The Right Thing for Your Shareholders with Taobao and AliPay

It's been a difficult 7 months for Yahoo! shareholders. Last week's shareholder meeting did little to quell concerns about the company's prospects moving forward.

Yahoo!'s board and management team essentially argued to shareholders in their presentation: trust us; we have a plan and we will execute against it.

I attended the meeting and asked about several governance-related incidents which have happened in the last year and have not been -- in my opinion -- in the interests of Yahoo! shareholders. The whole Vote-Gate announced earlier this week has been even more disconcerting.

It's sad to say, but I don't believe Yahoo!'s board or management team have done enough to deserve our respect and trust. Therefore, we need to continue to be vigilant and speak out for our own good.

I want to make Yahoo! shareholders aware of a potential scandal which has yet to occur. Hopefully, with enough pressure ahead of time, we can ensure it does not become a scandal. It relates to Yahoo!'s Asian assets, which have been much discussed in the last few months as a way of unlocking value for beleaguered Yahoo! shareholders.

As CFO Blake Jorgensen articulated during last week's shareholder meeting, Yahoo!'s collection of Asian assets (from its stake in Yahoo! Japan, to Alibaba in China, and Gmarket in Korea) are worth about $7 / share to Yahoo! shareholders at today's market prices. However, as Blake noted, Yahoo! maintains significant ownership (through its Alibaba stake) in two private Chinese companies: Taobao.com (China's eBay) and AliPay.com (China's PayPal).

Both have huge potential. They already are the leaders in their verticals in China. eBay just retreated from the Chinese market because of their inability to compete. They have also deliberately chosen to grab market-share in the past few years by not charging users fees. As you can imagine, these economics have helped their user-base explode. Neither company has minded doing this, because their costs are very low and they both know that they can turn the meter on at any time with a very large payback.

So, here's the governance issue: how should these assets be valued if Yahoo! wants to extract value from their stake in these private companies? If you valued them today, there are no revenues and negative earnings. If you valued them in a year or two when they each turn their meters on and generate hundreds of millions of dollars, you would have a much more valuable company.

There are two ways Yahoo! might extract value from Taobao.com and AliPay.com:

(1) agree to a Management Buy-out with each company's management or with Alibaba or;

(2) spin-off these assets to Yahoo!'s shareholders.

The latter option is the right thing to do for Yahoo! shareholders. Even if these shares are valued low today relative to what they will be in a few years after they start charging fees, Yahoo! shareholders can decide whether to hang on to them or not.

The Management Buy-out approach could be exploited. Alibaba or the management teams could decide to buy back Yahoo!'s stake at today's artificially low prices -- knowing full well they are buying an asset that will be worth 3 - 6 times as much in a very short time. Who wouldn't want that type of sweet-heart deal?

I do not know what Yahoo! is contemplating with these assets, but I believe sunlight is the best disinfectant. Better to bring this issue to light now and remind them to not even go there, then scream bloody murder after the fact when it's a done deal.

I wouldn't be as skeptical that such a sweet-heart deal might occur if I hadn't witnessed Yahoo! selling its $395 million / year Overture Japan business to Yahoo! Japan (Softbank) for $13 million last August. I asked Jerry about this deal last Friday. He said that Investor Relations had answered my question last year when I first raised it. (They didn't; they merely repeated Blake Jorgensen's public comments during two analyst calls which were vague and provided no clear rationale.) Jerry also suggested to me in his comments that there were "tax reasons" for doing such a deal, without further explaining. (Jerry: If there were such reasons, can you elaborate for the benefit of shareholders?)

Softbank got a great deal for Overture Japan. Alibaba shouldn't get a great deal for Taobao.com and AliPay.com. Yahoo! shareholders deserve to be treated fairly.

Disclosure: Author is long YHOO

Comments

[aspenboy:]

Great article. Am relatively new to YHOO as I recently bought on this weakness.Dumb question-how can they get away with selling their Overture/Japan stake for a fraction of its worth w/out shareholders/funds raising cain ?This is rather baffling.
Do u see much chance of Yang ouster after votegate? Thx.!

2008 Aug 10 11:40 AM

[Eric Jackson:]

They get away with it because shareholders do not raise their voice to it and the topic has been ignored by the press and Wall Street analysts. If shareholders don't speak up for ourselves, no one will.

2008 Aug 10 03:19 PM

[mgv11:]

I'm a little confused, we are talking about value / future value and how yahoo could screw it up and for some reason it is implied that JY will. But if we sit and look at it, isn't this exactly why he didn't want to sell to Microsoft? He knew there was more value to be unlocked with Yahoo, granted it is now up to management to get that word out. This piece was great for doing that, thank you Eric. Please keep us up to speed on how Yahoo does at maximizing these hidden values.

2008 Aug 10 10:05 PM

[marketwatchr:]

This is one of the poorest management and Boards in the country.

2008 Aug 10 10:44 PM

[bato sa bato:]

Hi Eric ,thanx for your very insightful article. I'm also a new share holder of yhoo and my question is,Is it a good time to buy alibaba share since the stock is still down?

2008 Aug 11 11:40 AM

[Eric Jackson:]

Yes, they sought to stay independent to unlock value. Yet, they sold off Overture Japan (doing $396 mm a year in revenues) for $13mm. They've yet to provide a credible explanation for that. Shareholders and the press didn't notice or bat an eye. They cannot be allowed to give sweet-heart deals to friends.

2008 Aug 11 11:40 AM