Why is Dan Loeb Cutting His Yahoo Stake?
Salvatore "Sam" is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Legendary hedge fund manager Dan Loeb, founder of Third Point, cut his stake in Yahoo! (NASDAQ: YHOO) by about 15% late last week, selling shares on Thursday and Friday. Should investors be concerned?
According to Third Point, the sale was “motivated...by a desire to maintain a roughly consistent percentage holding of Yahoo’s outstanding shares as the company pursues its $5 billion buy-back authorization.”
Loeb still holds 62 million shares of Yahoo, or about 5.3% of the company. Does he believe that Yahoo can be turned around, or are these sales the beginning of his cashing out and moving on?
Loeb’s investment has worked out great for Yahoo’s shareholders
Fellow hedge fund manager Kyle Bass told CNBC’s Gary Kaminsky on Friday that Loeb was one of the smartest investors he knew, and that he “would never bet against Dan Loeb.”
Since Loeb got involved with Yahoo, he’s seen about a 50 percent return. Loeb began acquiring his Yahoo stake in August of 2011, when shares were trading around $13 -- shares closed Friday at $19.76.
It’s important to note that most of Loeb’s gains came in the fourth quarter of 2012. Not so coincidently, this period was one in which Yahoo began returning the $4.3 billion it received from selling half of its stake in China’s Alibaba Group to shareholders (an agreement which allows Yahoo to sell the rest of the stake after an Alibaba IPO).
But Yahoo has no definitive plan for future growth
Despite Yahoo’s recent rally, the company has few sources of long-term growth. Yahoo abandoned its search engine years ago, instead relying on Microsoft’s Bing. It has no social network like Google+ or Facebook. It has no operating system, mobile or otherwise. And it has no browser -- something that appears increasingly important in a cross-platform world.
In short, Yahoo is a collection of valuable Internet properties. A collection of Yelps and Groupons united under the familiar Yahoo umbrella: Yahoo finance, Yahoo mail, Yahoo sports, and Flickr, to name a few.
On the earnings call last week, CEO Marissa Mayer was mum on the company’s plans for the future. She spoke of a continued focus on attracting quality employees and a shift to an increased personalization of the web for users (whatever that means).
But when it comes to specifics, there was nothing: No revolutionary device; nothing to shake up the mobile Internet or change the way people use the web. Perhaps that is why investors sold shares of Yahoo the day after it posted earnings that exceeded Wall Street’s expectations.
Is Loeb in Yahoo simply for a cash grab?
From the time he got involved in Yahoo, Loeb went after the company’s management. Rightfully so, he identified an inept board as a key reason as to why Yahoo had changed little since the turn of the millennium.
After he forced out Yahoo’s management, he got himself and two of his allies appointed to the board. He then brought in ex-Google exec Mayer, a CEO he was reportedly instrumental in attracting.
Then, Yahoo suddenly opted to sell half its stake in Alibaba and return the capital to shareholders. In July, Mayer suggested that the capital might be kept to finance a number of takeovers. But that didn’t happen. Instead, Yahoo has been embarking on a massive share repurchase program, likely the key reason as to why shares rallied so significantly in the fourth quarter.
By Third Point’s own admission, the hedge fund is reducing its stake in the company as the share repurchase winds down. Will Loeb completely sever ties once the Alibaba-fueled buyback ends?
Investors might have seen this story before in Sears
If Loeb is involved in Yahoo simply to strip and liquidate the company's assets, it wouldn't be unfair to compare the move to one undertaken by another hedge fund manager: Eddie Lampert.
Lampert took control of Sears Corporation in 2005, merging it with Kmart to form Sears Holdings (NASDAQ: SHLD). Rather than work to create a formidable retail chain to challenge the likes of Wal-Mart or J.C. Penney, many believe that Lampert viewed the investment as a play on the company's underlying real estate holdings and its iconic brands like Craftsman.
But even if that's the case, it hasn't worked out well for the company's investors. Shares of Sears peaked in 2007 just shy of $200. Since then, shares have never exceeded $130. On Tuesday, Sears shares closed at $47.37.
Of course, Sears and Yahoo operate in very different worlds: Yahoo is an Internet giant, Sears is a retail chain. But the fundmanetal comparison, that of two has-been companies being stripped of assets to satisfy hedge fund managers, remains.
Bulls might argue that AOL is a better comparison
A more favorable comparison for Yahoo bulls is that of AOL (NYSE: AOL).
CEO Tim Armstrong (coincidently also of Google origin) took over the once dominant Internet service provider in March of 2009. He sought to remake AOL as a digital media company, and in the process, he sold off a number of assets for billions of dollars. These included the sale of Bebo, and most recently, a patent deal with Microsoft that raised $1.056 billion.
The cash from the sale of those patents was returned to shareholders through a special dividend and $600 million stock repurchase program.
Yet, Armstrong's time at AOL hasn't wholly been about asset sales: Armstrong has purchased a number of companies as well, most notably The Huffington Post, bought for a cool $315 million.
But if Loeb is in Yahoo just to sell assets, there are still more that can be sold
Maybe Loeb will stick around past Yahoo's current buyback. Yahoo still owns 23% of Alibaba, of which Alibaba itself has the right to purchase half of that stake before an IPO. Yahoo can then sell its remaining shares once Alibaba begins trading.
Depending on how Alibaba is valued, that could net Yahoo billions -- money which could be returned to shareholders.
There’s also Yahoo’s Japanese cousin, Yahoo Japan. Yahoo America owns 35% of that, which if sold off, could bring in billions more. Again, more money for shareholders and possibly for Loeb.
Yet, lost in the shuffle is Yahoo’s core business. If Mayer cannot get her hands on that cash, she may be hamstrung in what she can do to build Yahoo itself. In the end, if investors come to see Loeb’s Yahoo involvement as nothing more than a cash grab, upside may be limited.
Perhaps that is why Loeb is cutting back.
joekurtz is short shares of Yahoo and long shares of Groupon. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!