Tuesday, September 20, 2011

MarketWatch: An idea to appease Yahoo investors

From today's Therese Poletti's MarketWatch column:

By Therese Poletti, MarketWatch
SAN FRANCISCO (MarketWatch) — Investor Eric Jackson has some ideas for Yahoo Inc. that could appease its battle-scarred investors and solve the problem of what to do with the company’s highly valued Asian assets.
Some readers might remember that Jackson has been an outspoken investor when it comes to Yahoo YHOO -0.10% . In 2006, he wrote an open letter calling on Terry Semel to step down as chief executive. He also was one of the more vocal activists who criticized the board during Carl Icahn’s proxy fight with Yahoo in 2008.
This time around, Jackson has been relatively quiet, mostly opining in columns on Forbes and on Twitter.
First and foremost, he said he would prefer that Yahoo simply spin out its Yahoo Japan assets to shareholders, either though a sale to Softbank Corp. or some sort of other spinout.
But if that doesn’t happen, his next best idea is for Yahoo to create three separate tracking stocks. It’s a tactic that has been used by other media companies in the past — including Liberty Media Corp., which embarked on the idea in 2006 and has since resulted in three tracking stocks.
“They wouldn’t have to seek Softbank’s approval or Alibaba’s approval, which otherwise might be a sticking point,” said Jackson, referring to Yahoo’s 40% stake in the privately held Alibaba, the largest e-commerce company in China. In addition, Softbank JP:9984 -1.63%  of Japan owns about 29% of Alibaba.
“They would have to present it to shareholders, but that’s probably a foregone conclusion because anything that is going to create more value than the current status quo” would get approved, he added.
Jackson, whose firm Ironfire Capital currently owns a stake in the Internet pioneer worth about $25 million, said he has pitched the idea to Yahoo, but doesn’t believe the company is receptive to this notion. Jackson’s proposal would include a tracking stock for the core Yahoo business, another for Yahoo Japan and another stock to represent its 40% stake in Alibaba.
“I have presented these ideas to them,” he remarked. “I sense a weariness from them. They say, ‘We have already thought of that. Our experts have problems with that.’ I think that goes back to the tone at the top, the tone coming from the board.”
Investors appear to be fed up with Yahoo’s board, which fired former Chief Executive Carol Bartz two weeks ago. Hedge-fund investor Daniel Loeb, whose firm Third Point has a 5.2% stake in Yahoo, said he will wage a proxy fight and propose a slate of new directors at the annual meeting next year if he’s unable to make any headway with the board.
“From the failed Microsoft MSFT +0.04%  sale negotiations; to a subsequent bungled and disappointing search deal with Microsoft; through a series of misguided CEO selections; and most recently the Alipay debacle, this board’s failures have destroyed value for all Yahoo stakeholders,” Loeb wrote in his letter to the company’s board two weeks ago.
As Loeb notes, one of the many sore points for investors is the company’s hefty stake in the privately held Alibaba, which has at least one pre-IPO property, Taobao.
Jackson’s theory is that a tracking stock could mirror the value of the Asian assets, which cannot be easily spun off. The shareholders, though, don’t have any ownership of the assets they are tracking.
“To me and to a lot of Yahoo investors, looking at the Yahoo Japan piece, there is a value to be extracted there,” according to Jackson. “But it’s time to harvest that asset.”
Short of that, the tracking stocks would be a way to share some of the underlying value with investors. With a lot of the M&A talk going on regarding Yahoo, with private-equity firms reportedly looking at the company, Jackson said it would be a mistake to sell off the entire Alibaba stake. “It’s going to go through some huge growth,” he commented. Read more about potential bidders taking a look at Yahoo.
Tracking stocks certainly can be problematic in and of themselves, because there still remains one legal corporate entity, one CEO and conflicts among the different shareholder groups as to the allocation of resources in a company.
But since Yahoo’s core operations have nothing to do with Alibaba, a tracking stock for those assets might work as a way to assign the real value to the assets that many investors believe are propping up Yahoo’s shares.
Another potential problem with this idea is that Alibaba is private, and its financials are mostly undisclosed. Investors would need this sort of data to evaluate such a tracking stock. Yahoo would have to disclose Alibaba’s financials to U.S. regulators as well as investors.
“Yahoo could do this and Alibaba Group wouldn’t be able to stop them,” Jackson said. “It is completely within Yahoo’s current set of rights. However, Alibaba doesn’t want to release their full financials, because this lowers their bargaining power in trying to buy back part of their 40% stake that Yahoo controls before Alibaba Group decides to IPO.”
Even Jackson agrees that with all the deal chatter, this scenario is not likely to happen, unless one of the companies looking at Yahoo is Liberty Media itself. With Greg Maffei, former chief financial officer of both Microsoft and Oracle as Liberty’s current chief executive, it’s not completely out of the realm of possibility. 
Therese Poletti is a senior columnist for MarketWatch in San Francisco.

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