This week we learned that the much-talked-about spin-off of Alibaba (BABA) shares by Yahoo Inc (YHOO) is about to be called off. Yahoo simply bowed to shareholders’ pressure — a sign as clear as any that investors have revoked their vote of confidence in CEO Marissa Mayer.
But are they right to do so?
Evidence suggests that they are certainly justified in their actions.
20 Mergers Down the Drain
Back in July 2012, when Marissa Mayer took the helm, she brought with her an impeccable record from Google — or as it’s called now, Alphabet (GOOG, GOOGL). She had a keen eye for identifying the way a product should look and feel. She also innately sensed what made one product better than another. For instance, she was attributed with giving the Google home page a clean, sleek look.
When Mayer came aboard as Yahoo’s CEO, tasked with refocusing the company and reallocating resources, she was greeted with cheer.
Marissa Mayer didn’t wait long to act; she embarked on a spree of purchases in order to revive Yahoo stock. These would allow the company to make up for lost time by buying smaller startups.
According to Mashable, among Yahoo’s 20 acquisitions are these:
- PlayerScale — A startup that helps developers distribute games they’ve developed over multiple platforms.
- Astrid — A to-do list and email management app.
- MileWise — Allows users find cheap flights and utilize their credit card points.
- Jybe — An app that creates personalized recommendations of things to do and places to eat.
- Tumblr — A microblogging platform (and perhaps the most notable of all Mayer’s acquisitions; Yahoo paid $1.1 billion).
This hodgepodge list of acquisitions suggests a complete lack of focus. Many of the acquisitions are from different, wholly unrelated segments. It’s hard to see how any of these startups, individually or collectively, could provide a breakthrough for Yahoo.
And how much have all those purchases yielded? Perhaps if we were a Yahoo insider we’d know for sure, but on the surface of it? It looks a lot like nothing and might as well be worth zero!
As of now, Yahoo’s share of Alibaba is 15%. If we extract how much it’s worth using Alibaba’s market cap, we get $29.7 billion. At the moment, Yahoo stock’s market cap is $31.1 billion. That leaves Yahoo’s core business, excluding Alibaba, at $ 1.4 billion.
That $1.4 billion includes Yahoo’s 35.5% stake in Yahoo Japan, which according to the Financial Times is worth roughly $3.1 billion. Now, if that were to be spun off (after taxes) it would leave a negative value for Yahoo’s core venture with all 20 mergers.
To be fair, the two “jewels” in Yahoo, Yahoo Japan and Alibaba, are part of the legacy Mayer inherited when she became CEO.
Of course, this is, first and foremost, a signal of how badly Yahoo’s core business is doing. But considering Yahoo stock’s market cap a year ago was almost $47 billion it says something about Mayer’s shopping spree. That willy-nilly spending can, at least in part, be blamed for the destruction of value in Yahoo stock.
The $1.1 billion Tumblr investment might also fizzle, given that Facebook keeps taking bigger and bigger bites of the blogosphere.
Back to the Alibaba Spinoff
It’s ironic but Alibaba has such an impact on Yahoo’s balance sheet that, effectively, it is Alibaba that “owns” Yahoo. Certainly Alibaba’s business has more impact on Yahoo stock than Yahoo itself. And this also means that Jack Ma, Alibaba’s CEO, has more of an impact on Yahoo stock than Mayer.
Investors pressured Mayer into ditching her plans for the Alibaba $32 billion spinoff. The message couldn’t be any blunter. Investors let Mayer know, in no uncertain terms, that they want it to stay that way. Not to mention there are now plans in the making to spin-off Yahoo’s core business. That will force Marissa Mayer to cede what little control she has.
And it’s no wonder; the fact is, Mayer’s 20 acquisitions failed to yield anything of value. Investors would be crazy to let Mayer allocate $32 billion of their share in Alibaba in more useless mergers.
Perhaps Mayer’s biggest mistake was failing to understand that Yahoo was, for all intents and purposes, a dying company. Mayer accepted the role of CEO to a company that could be considered a “lost cause.” That suggests that, perhaps, it’s not entirely her fault.
Marissa Mayer essentially had no choice but to cave to investors’ pressure over the Alibaba spinoff. The spinning off of Yahoo’s core business is Mayer’s final admission of defeat.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
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