Saturday, 19 April 2014

Yahoo: Conglomerate Discount

I wrote before about what is called "Holding Company Discount".

Bloomberg published an interesting article about this same issue, but calls it "Conglomerate Discount". The article is about Yahoo, and its holdings in Alibaba and Yahoo Japan.

"How Can Yahoo Be Worth Less Than Zero?"

The article is written by Matt Levine, some snippets:

"Yahoo Inc. is a public company consisting of a portfolio of

1. whatever you think Yahoo is,
2. a 35 percent stake in a separate but similar publicly traded company called Yahoo Japan, and
3. a 24 percent stake in a separate, different, soon-to-be-publicly traded company called Alibaba.

My Bloomberg View colleague Matt Klein ran the numbers in March, and non-Bloomberg-affiliated Matt Matt Yglesias ran them again today, and the numbers tell you that 2+3 > 1+2+3, as it were: Yahoo's Alibaba and Yahoo Japan stakes add up to be worth more than Yahoo is worth."

"One obvious question is, how can that be true? The actual Yahoo business -- call it "Core Yahoo" -- still makes hundreds of millions of dollars a year in profits, which theoretically belong to shareholders. A thing that pays you positive hundreds of millions of dollars a year shouldn't be worth negative billions of dollars.

Of course, profits that theoretically belong to shareholders aren't necessarily paid out to shareholders: Yahoo pays no dividend and has a ... checkered management history, so you could easily take the cynical view that Yahoo will plow those profits back into a declining business, be completely mismanaged, run the business into the ground and leave shareholders with nothing."

Core Yahoo is worth less than zero because it's an arithmetic residue of taking a bunch of businesses with very public price tags on them and applying a conglomerate discount.

That discount isn't really about the viability of the core business; it's about the fact that investors don't have direct access to any of the individual businesses, but have to buy them in packaged conglomerate form where any gains on the business they want can be wiped out by losses on the ones they don't.

I learned my lesson the hard way, about 20 years ago. I was quite impressed by the growth of AMMB, but calculated that AMCorp (owning a chunk of AMMB plus some other businesses) was a cheaper entry to AMMB. And on top of that, AMCorp had ICULS that traded at a discount to its shares.

That is a lot of discount on top of a lot of discount, what possibly could go wrong?

Well, in short, a lot:
  • AMMB had been growing very fast, but that was actually a red flag, in the Asian crisis fast growing banks would be hit hard; less aggressive banks (like Public Bank) did relatively better;
  • AMCorp's other businesses (if I remember correctly, a money-lending business) did very badly, and AMCorp apparently continued to support those.
Years later, AMCorp was privatised by its major shareholder in 2006 for RM 1.40, only a fraction of what it had been trading for a decade before. Soon afterwards AMCorp sold a large chunk of AMMB shares to ANZ (Australia and New Zealand Banking Group).

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