Monday, January 09, 2017

No, Yahoo! isn't changing its name

Trending on social media is how Yahoo is changing it's name to "Altaba" and CEO Marissa Mayer is stepping down. This is false.

What is happening instead is that everything we know of as "Yahoo" (including the brand name) is being sold to Verizon. The bits that are left are a skeleton company that holds stock in Alibaba and a few other companies. Since the brand was sold to Verizon, that investment company could no longer use it, so chose "Altaba". Since 83% of its investment is in Alibabi, "Altaba" makes sense. It's not like this new brand name means anything -- the skeleton investment company will be wound down in the next year, either as a special dividend to investors, sold off to Alibaba, or both.

Marissa Mayer is an operations CEO. Verizon didn't want her to run their newly acquired operations, since the entire point of buying them was to take the web operations in a new direction (though apparently she'll still work a bit with them through the transition). And of course she's not an appropriate CEO for an investment company. So she had no job left -- she made her own job disappear.

What happened today is an obvious consequence of Alibaba going IPO in September 2014. It meant that Yahoo's stake of 16% in Alibaba was now liquid. All told, the investment arm of Yahoo was worth $36-billion while the web operations (Mail, Fantasy, Tumblr, etc.) was worth only $5-billion.

In other words, Yahoo became a Wall Street mutual fund who inexplicably also offered web mail and cat videos.

Such a thing cannot exist. If Yahoo didn't act, shareholders would start suing the company to get their money back.That $36-billion in investments doesn't belong to Yahoo, it belongs to its shareholders. Thus, the moment the Alibaba IPO closed, Yahoo started planning on how to separate the investment arm from the web operations.

Yahoo had basically three choices.
  • The first choice is simply give the Alibaba (and other investment) shares as a one time dividend to Yahoo shareholders. 
  • A second choice is simply split the company in two, one of which has the investments, and the other the web operations. 
  • The third choice is to sell off the web operations to some chump like Verizon.

Obviously, Marissa Mayer took the third choice. Without a slushfund (the investment arm) to keep it solvent, Yahoo didn't feel it could run its operations profitably without integration with some other company. That meant it either had to buy a large company to integrate with Yahoo, or sell the Yahoo portion to some other large company.

Every company, especially Internet ones, have a legacy value. It's the amount of money you'll get from firing everyone, stop investing in the future, and just raking in year after year a stream of declining revenue. It's the fate of early Internet companies like Earthlink and Slashdot. It's like how I documented with Earthlink [*], which continues to offer email to subscribers, but spends only enough to keep the lights on, not even upgrading to the simplest of things like SSL.

Presumably, Verizon will try to make something of a few of the properties. Apparently, Yahoo's Fantasy sports stuff is popular, and will probably be rebranded as some new Verizon thing. Tumblr is already it's own brand name, independent of Yahoo, and thus will probably continue to exist as its own business unit.

One of the weird things is Yahoo Mail. It permanently bound to the "" domain, so you can't do much with the "Yahoo" brand without bringing Mail along with it. Though at this point, the "Yahoo" brand is pretty tarnished. There's not much new you can put under that brand anyway. I can't see how Verizon would want to invest in that brand at all -- just milk it for what it can over the coming years.

The investment company cannot long exist on its own. Investors want their money back, so they can make future investment decisions on their own. They don't want the company to make investment choices for them.

Think about when Yahoo made its initial $1-billion investment for 40% of Alibaba in 2005, it did not do so because it was a good "investment opportunity", but because Yahoo believed it was good strategic investment, such as providing an entry in the Chinese market, or providing an e-commerce arm to compete against eBay and Amazon. In other words, Yahoo didn't consider as a good way of investing its money, but a good way to create a strategic partnership -- one that just never materialized. From that point of view, the Alibaba investment was a failure.

In 2012, Marissa Mayer sold off 25% of Alibaba, netting $4-billion after taxes. She then lost all $4-billion on the web operations. That stake would be worth over $50-billion today. You can see the problem: companies with large slush funds just fritter them away keeping operations going. Marissa Mayer abused her position of trust, playing with money that belong to shareholders.

Thus, Altbaba isn't going to play with shareholder's money. It's a skeleton company, so there's no strategic value to investments. They can make no better investment choices than its shareholders can with their own money. Thus, the only purpose of the skeleton investment company is to return the money back to the shareholders. I suspect it'll choose the most tax efficient way of doing this, like selling the whole thing to Alibaba, which just exchanges the Altaba shares for Alibaba shares, with a 15% bonus representing the value of the other Altaba investments. Either way, if Altaba is still around a year from now, it's because it's board is skimming money that doesn't belong to them.

Key points:

  • Altaba is the name of the remaining skeleton investment company, the "Yahoo" brand was sold with the web operations to Verizon.
  • The name Altaba sucks because it's not a brand name that will stick around for a while -- the skeleton company is going to return all its money to its investors.
  • Yahoo had to spin off its investments -- there's no excuse for 90% of its market value to be investments and 10% in its web operations.
  • In particular, the money belongs to Yahoo's investors, not Yahoo the company. It's not some sort of slush fund Yahoo's executives could use. Yahoo couldn't use that money to keep its flailing web operations going, as Marissa Mayer was attempting to do.
  • Most of Yahoo's web operations will go the way of Earthlink and Slashdot, as Verizon milks the slowly declining revenue while making no new investments in it.


newt0311 said...

I think Matt Levine did the best job of summarizing Yahoo's situation. See here for example:

Fazal Majid said...

Altaba will not sell its shares in Alibaba. Doing so would incur a massive capital gains tax liability if it did so. Instead it will be an Exchange Traded Fund (ETF) that holds only two stocks, Alibaba and Yahoo Japan. This is only formalizing what's been de facto for half a dozen years, since Yahoo shares were hitherto the only way for westerners to invest in Alibaba. They just won't be getting a discount for the legacy Yahoo baggage any more.