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Bill Robinson

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The Unholy Mess That Is Yahoo

Posted: 11/01/11 01:52 PM ET

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I have never liked how Internet companies are valued; it's not based in reality.

Instead of revenues, profit margins, EBITDA and other key financial metrics, there seems to be an absurd alchemy at work that involves intangibles like goodwill and some fuzzy vision around "future value."

This is why the smaller investors get absolutely hammered when they try to "stay in" too long. Note closely: institutional investors like Goldman Sachs or Morgan Stanley, which always get out early, recognizing that there's no, and never was, any real "future value," take money away from other less-connected investors. The result: the little guy gets screwed by the big guys and becomes gun shy to invest again.

Remember this as you read this article: When financial services people, corporations and the media talk about the "value" of a company, they're usually referring "market capitalization," meaning the number of outstanding shares of stock times the share price. Obviously, if the stock is overvalued -- not justified by the revenues and profits of the company, we have a problem Houston; a big one.

Yahoo is a perfect example. In Friday's Wall Street Journal (WSJ) the writers covered in fine detail the many recent machinations of Yahoo's efforts to revive its myriad businesses and, in essence, survive.

What the WSJ article did not cover in any detail at all, however, was the revolving door for CEOs that Yahoo has created and continues to use with dizzying efficiency -- about the only apparent efficiency at work there. From Terry Semel to the dreadful, vulgar Carol Bartz (who should've been fired immediately after she was hired) to who knows who next, Yahoo has been the poster-child for corporate mismanagement.

Let's investigate the simple numbers about Yahoo's businesses which the WSJ explains; I don't think they add up.

The article starts out explaining that Yahoo is striving, really putting everything they have into avoiding paying approximately $5 billion in U.S. taxes which would become due if they sold their estimated 40 percent stake in "Chinese e-commerce company," Alibaba Group Holding Ltd. This stake, the WSJ tells us, was "recently valued by Yahoo at about $14 billion." This expert -- me -- puts the value of that stake at "about a lot less than $14 billion, try $10 billion or even $5 billion."

Now, besides the obvious slap-in-the-face this tax avoidance scheme represents to Obama's efforts to tax business at a higher rate and to the American taxpayer in general, it is also indicative of a company very much clawing for its continued existence. "Desperation" is a word that comes to mind, but almost doesn't do the Yahoo executives' final death-rattle justice. Not only are they selling off an asset they had previously described as being strategically crucial to their business but also they are seeking to shelter the income.

Let's look at what I think is the absurd claim that Yahoo's stake in the murky Alibaba is worth anything even remotely close to $14 billion.

Way back in 2005, when Yahoo paid the absurdly high sum of $1 billion for a 40 percent stake in Alibaba, many thought they were overpaying. (See the greedy smiles on the faces of Alibaba founder Jack Ma and then Yahoo COO Dan Rosensweig announcing the investment).

I thought this was an insane investment then and think it's far worse now. Except for the hyping and smoke and mirrors accounting of the companies' financial people, nobody would've invested one dollar in Alibaba. Except Yahoo. And they were looking for an offshore way to shelter themselves from taxes and build revenue (and cash reserves).

It's very hard to get a clear grip on how much money in sales and profits Alibaba really has, because as a Chinese company traded on the Hong Kong exchange, they don't have to file their numbers with the U.S. authorities such as the SEC.

But in this Alibaba-released earnings statement, the company divulges 2010 Q4 revenue of about 1.5 billion Chinese Yuan (formerly RMB now CNY). This figure translates to about $235 million in total quarterly revenue for Alibaba. Net income for the quarter was 410 million CNY or about $64 million. These numbers don't come anywhere close to justifying a market value of $47.4 billion; not even close.

Unless, of course, you're the one trying to sell your stake in Alibaba and then shirk paying taxes on the proceeds. And who pays? The U.S. taxpayers, of course.

Look at what a dog the Alibaba stock has been in the Yahoo (ironic?) 5-year chart. From a high of over $40 per share in late 2008, Alibaba's stock nosedived to well under $5 a share in late 2009 -- less than one year. Currently, this laggard stock is under $10 per share.

And so it goes, that as Yahoo is trying to sell its Alibaba stake for as much as it can get some fool to pay, Alibaba is trying to use its inflated market value to buy Yahoo.

The article goes on to state that another asset Yahoo's trying to get off from around its neck is that of Yahoo Japan. The WSJ gives Yahoo's estimate that the 33 percent stake that Yahoo owns in Yahoo Japan is worth about $6 billion -- and the market cap for Yahoo itself to be $21 billion. These numbers, like the ones for the current value of Yahoo's Alibaba investment, are clearly dubious.

If I understand the financials that Yahoo is putting out with credibility supplied by the WSJ, the total value of Yahoo's stake in Alibaba, $14 billion, plus the value of their stake in Yahoo Japan, $6 billion equals $20 billion. With a current Yahoo market cap of under $21 billion, this would leave the total assets and revenue of Yahoo itself as only amounting to a little under $1 billion. Rubbish.

In a superheated technology stock market, when the bottom is looking ready to fall out again a la NASDAQ April 2000, a lot of people will lose their nest egg and shirts in the resulting calamity from these kinds of mirage financial transactions where nobody but the small investor loses. And as I mentioned earlier, that's me and you, folks.

 

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