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Last Tuesday's earnings report from Yahoo! (Nasdaq: YHOO ) brought out the usual suspects calling for the head of Carol Bartz. The embattled CEO of the much-maligned company has faced harsh criticism from the start of her tenure at Yahoo! as much for her brash, in-your-face attitude as for her management of the company's mediocrity.
With the company's own core business performing better, Bartz is now instead being persecuted for her "handling" of the company's extremely valuable Asian assets, particularly its 40% share in China's leading e-commerce player Alibaba. Investors want Bartz to unlock the value of these assets ASAP, even if patience might be rewarded with greater shareholder returns down the road. Larry Haverty, a portfolio manager at Gamco Investors, was interviewed recently by Bloomberg Television and shared this disappointment. He said, "If you believe that the job of management is to maximize shareholder value as I do, Carol and her crew are not doing a particularly good job of it."
Haverty's company owns shares of Yahoo! and he also owns it personally, so clearly a fast stock appreciation would be important for him and investors in his fund. He believes a new management team would be able to unlock the value of these Asian assets much sooner than Bartz and her current team. While I won't argue with Haverty that Bartz hasn't been a star in the CEO position, I disagree that a new management team would be able to provide a more rapid return on these assets and -- more importantly -- I don't think this would maximize the shareholder value that Haverty values so much.
It's pretty well known that Bartz doesn't exactly have the best relationship with Chinese icon and chairman of Alibaba Jack Ma. Yahoo!'s Alibaba stake includes e-commerce businesses such as Taobao.com and Alipay, China's equivalent to eBay (Nasdaq: EBAY ) and Paypal. Alipay just surpassed Paypal as the largest online payment platform in the world. Taobao.com is currently the 15th-most popular website in the world and fourth in China, and it commands 87% of the Chinese e-commerce market.
The most lucrative option to unlock the value of Alibaba would be through an Initial Public Offering of TaoBao or Alipay, and judging by the recent IPOs of Chinese Internet companies, lucrative is the understatement of the year. For example, Qihoo 360 Technology's (NYSE: QIHU ) recent IPO saw its stock price more than double in the first day of trading. Qihoo makes the second most popular web browser in China, trailing only Microsoft's (Nasdaq: MSFT ) Internet Explorer, but the company only became profitable in 2009 and competes in a very competitive market. A similar phenomenon happened when E-Commerce China Dangdang (NYSE: DANG ) and Youku.com (NYSE: YOKU ) went public recently. Both stocks still sport ridiculously frothy valuations despite spotty operating metrics. Dangdang recently posted its first earnings report as a public company, reporting tiny margins between 1% to 2%, and Yoku isn't close to profitability.
On the other hand, Alibaba's properties like Taobao.com and Alipay boast high-margin models, and the company has described Taobao.com as very profitable. It is believed that more than 50% of all deliveries in China were goods bought or sold on Taobao.com. So I have to believe a Taobao or Alipay IPO would certainly be quite a spectacle.
A strong hand
Sure, Bartz could sell all or part of Yahoo!'s stake in Alibaba back to the company -- which would certainly give Yahoo! shares a short-term pop -- but this is presumably exactly what Jack Ma wants before filing for an IPO. If the recent IPOs of these less-heralded Chinese Internet plays are any indication, the price he would have to pay in a negotiation is likely to be well below the value the market would place on these shares.
Ma also wants to create the greatest return for his shareholders, which means attaining a larger stake in some of these properties before entertaining a public offering. However, in this regard Bartz and Yahoo! have the upper hand and appear to be willing to wait it out. In the near-term this is clearly not the most lucrative strategy for the stock price, but if maximizing shareholder value is Bartz's job, I believe she is currently in compliance with her handling of the company's stake in Alibaba. The two sides appear to be locked in a game of chicken and Bartz and Yahoo! should be in no hurry to flinch.
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