Today we know Berkshire Hathaway (BRK.B) as an incredibly successful conglomerate with business interests spread across many industries. But Berkshire Hathaway began life as a terrible investment in a fading textile business. The name stuck … but that was about it.
The difference-maker for Berkshire? Arguably it’s Geico, the second-largest auto insurer in the U.S. behind State Farm. Buffett paid approximately $2.4 billion for the entire company (obtained the remaining 49% in 1995) that today is valued at $14 billion.
What does that have to do with beleaguered tech giant Yahoo (YHOO), which seemingly warrants absolutely no comparison to Berkshire Hathaway?
Well, thanks to one of its holdings, Yahoo and Marissa Mayer do have the unthinkable opportunity to take the company down a similar road as the one walked by the Oracle of Omaha.
The Alibaba IPO Is Yahoo’s Golden Goose
The Alibaba IPO is expected to be the biggest of the year — and possibly ever. Some estimates put Alibaba’s value at as much as $245 billion, making Yahoo’s 24% stake in this scenario worth $58 billion — $23 billion higher than the entire market cap.
However, under the September 2012 repurchase agreement with Alibaba, Yahoo is obliged to sell up to 208 million shares in the Alibaba IPO. If it sells the full amount, Yahoo’s ownership stake would be reduced to 14.5%, or a more meager $35 billion — very close to the Street’s current valuation of YHOO stock.
Point being, it’s an impressive stash, even in the most conservative valuation scenario.
The problem — as InvestorPlace editor Jeff Reeves so ably points out — is that there’s no value in the rest of Yahoo’s business. According to Jeff’s math, the rest of Yahoo excluding its stakes in Alibaba and Yahoo Japan (YAHOY) was worth negative $9 billion at the end of March. Based on the optimistic $245 billion valuation of Alibaba, Yahoo’s remaining businesses are now worth negative $34 billion, considerably less than just six weeks ago.
So, what’s Marissa Mayer to do?
Well, if she’s read anything about Warren Buffett, she’ll know that his biggest regret was spending so much money trying to plug a leaking boat — in his case, it was Berkshire Hathaway — when he could have invested those funds in other insurance companies. He figures it cost shareholders about $200 billion. Quite an admission from someone so successful.
Rather than continuing to buy money-losing businesses like Tumblr, which cost the company $1.1 billion in cash and has done little to help Yahoo compete in online media, why not consider getting out of the business altogether?
Heed the advice of an investing guru and let your winners ride. Berkshire Hathaway shareholders have been handsomely rewarded as a result.
Berkshire Hathaway – A Tech Story
Let’s assume Alibaba continues to shine (and there’s no reason to think it won’t). If so, Mayer should use its Alibaba stake as the foundation for a new company investing in tech companies — and also non-tech companies that utilize technology as a competitive advantage — that are profitable or soon will be.
Like Berkshire Hathaway, it would have a component made up of private companies, as well as a portion dedicated to stocks like Alibaba and others.