I suppose a way to think about Yahoo! is that its stock has a sum-of-the-parts value equal to:
- the value of whatever the hell business it's in, plus
- the value of Dan Loeb owning a big stake and appointing 30% of its board.
Both of those sources of value are kinda nebulous? I mean, the first one, God knows, but the second is weird too; it's some combination of "Dan Loeb is smart and I am not so I should pay a bit more for things he likes" and "Dan Loeb is smart and Yahoo is not so he's adding value by keeping an eye on them," I dunno. Anyway not any more:
Yahoo! Inc. (NASDAQ: YHOO) today announced that it has entered into an agreement to repurchase 40 million shares of Yahoo! common stock beneficially owned by Third Point LLC ("Third Point"), at a purchase price of $29.11 per share. The purchase price equals the closing price of Yahoo! common stock on July 19, 2013.
Following the repurchase, Third Point will beneficially own approximately 20 million shares, representing less than 2 percent of Yahoo!'s outstanding common stock. In accordance with the Board's settlement agreement announced on May 13, 2012, each of the directors originally nominated by Third Point -- Daniel S. Loeb, Harry J. Wilson, and Michael J. Wolf -- have submitted their resignations from Yahoo!'s board of directors, effective July 31, 2013. The Board will then comprise seven members.
The simultaneous loss of smart-money ownership and adult supervision disappointed investors, with the stock down 4% today "amid concerns that Loeb’s move could ignite a bigger exodus of investors out of the stock." And people are really mad at Loeb for some reason. The complaint seems to be mostly that:
- Yahoo's stock price included a roughly $1.25-per-share being-owned-by-Dan-Loeb premium,1
- Yahoo paid Loeb that premium, but
- now that Loeb is mostly out that premium should no longer exists, so
- why should he get paid for it?
Well who should get paid for it? We've talkedbefore about how activists like to be able to accumulate their stakes in secret, because they tend to view the information that they like a company and want to change it as being proprietary to them. This is kind of the flip side to that: at the moment Loeb signed the sale agreement, he owned stock in Yahoo-with-Loeb. To get him out of that stock he wanted the Yahoo-with-Loeb price. That seems only fair, no? I mean, he was supplying the Loeb in that equation.
Daniel Loeb’s Yahoo exit hurts investors twice over. The Internet company is buying back two-thirds of the hedge fund mogul’s stake, owned by his firm, Third Point, for $1.2 billion. That sucks up most of the cash Yahoo reserved for repurchases. It also heralds the departure of three Third Point-approved directors, robbing Yahoo of some much-needed advisers.
Well, for one thing, the cash Yahoo reserved for repurchases came largely from Loeb, y'know, joining the board and pushing for asset sales and repurchases, as opposed to general bloat. Also I feel like if Yahoo wanted advice from 41-year-old retiree Harry Wilson and/or strategy and technology consultant Michael J. Wolf they could probably call and ask? Yahoo also said that it's "committed to revisiting the Board's size and composition" so it could just ask them to come back to the board? There is nothing stopping them. It's just that Loeb, after selling down his shares, can no longer force Yahoo to keep those guys on the board.2 If their advice is much-needed it can be obtained without much-trouble.
Of course there is some appearance of unfairness to the repurchase transaction itself. After all, if Yahoo had told Loeb to go sell in the market, it probably could have saved $50 million buying back his shares.3 This does look like rather a sweetheart deal for Loeb, and you could spin unpleasant theories about it if you like.4
But everything about activist investing looks a little unfair, if you focus only on the public's inability to share exactly in all of Loeb's profits. Like: he bought his stock at an average price of around $13.30. The day he announced his stake the stock closed up from $13.61 to $14.44, meaning that he clipped about a $1.14 hey-it's-Dan-Loeb premium on the way in. And another $1.25 on the way out, which suggests that the value of the Dan Loeb premium is fairly stable though if anything up over the last two years. Meanwhile the stock is now at $27.86, and while he's made around a billion dollars since buying into Yahoo, the public shareholders have made around $14 billion. Even if you attribute just a fraction of that gain to his doing, it seem a little petty to begrudge him his extra $50 million on the way out.
Yahoo! Announces Repurchase of 40 Million Shares Held By Third Point [Yahoo!]
Loeb Exits Yahoo; Investors, Analysts React [WSJ MoneyBeat]
Loeb Wins and Shareholders Lose Out at Yahoo [Breakingviews]
1.Just, like, the stock dropped $1.25 today, basically on this news.
2.Loeb, an employed person, may no longer have time for Yahoo. Also I have dropped the exclamation point on Yahoo! by now; a man can only tolerate it for so long.
3.The math is that, like:
- Loeb exit is announced, stock drops the $1.25 it dropped today;
- Loeb sells shares at a discount to market;
- Yahoo buys shares at premium to market.
In lazy expectation the last two cancel and it's just, like, he sells and Yahoo buys at today's price. Alternately ignore the market altogether and have him sell directly to Yahoo but at the post-announcement price, which presumably would satisfy like Henry Blodget.
4.Unpleasant theories include but are not limited to:
- Board is insufficiently solicitous of public shareholders, willing to do whatever board members self-interestedly ask for;
- Board/management want to get rid of Loeb and his outside supervisors and get back to being undisciplined and shareholder-unfriendly, are willing to pay a premium to do so;
- Board/management don't want to see Loeb sell in the market (in what might be an underwritten transaction, given the size and his control) because the questions that would be raised during the marketing have no good answers.