Yahoo, Alibaba And Why Mayer Can Keep Buying Whatever She Wants

A quick glance at Yahoo’s balance sheet might have you worried: Only $1.14 billion in cash and equivalents, and the company just dropped $1.1 billion on Tumblr? It seems profligate.

But happily for Yahoo investors, the company is not low on funds in the slightest. In fact, given its current balance sheet and asset pool, Yahoo is incredibly wealthy. That fact is ironically overshadowed by the simple truth that other tech firms are even richer. But hey, your $10 billion is someone else’s $50 billion.

This matters, as Yahoo is on a truly impressive acquisition spree, picking up 19 companies in the last year. Yahoo has been aggressively growing its internal cadre of mobile developers through aqui-hire, juicing its smartphone chops by agglomerating external teams to its own staff. Not all the purchases were large, but even modest acquisitions add up once you reach double digits.

If Yahoo intends to continue its mobile-first strategy, it will likely need to continue buying smaller companies. And to do that it needs cash. Let’s take a look at how much money Yahoo has.

During its video earnings call, Yahoo stated that it has $4.8 billion in cash and securities on hand. That essentially constitutes the money that it can use to acquire other firms. The $4.8 billion figure represents a decline of $600 million from the previous quarter in which Yahoo ended with $5.4 billion in cash and securities.

However, as its earnings statement notes, that $600 million is a cushioned decline:

[Cash] outflows were offset by $846 million in cash from Alibaba Group to redeem the Alibaba Group Preference Shares.

$800 million of that was the redemption of shares, with the remaining $46 million a form of dividend. That inflow of cash matters, as it dramatically lowered the decrease in Yahoo’s bucket of cash and marketable securities. Without the incoming $846 million, Yahoo lowered its reserves not by $600 million, but $1.446 billion, or what would have been 27 percent of its former quarter’s final balance.

That’s a much faster pace.

According to its balance sheet, Yahoo now owns no more Alibaba Group Preference Shares, meaning that it won’t be able to generate another $800 million in the current quarter from the sort of sale that helped it greatly in the now most recent quarter. So, is that a problem for the company? No.

When we discuss the long-term diminishment of Yahoo’s working funds, if it carries on as it did in the preceding quarter, we could forecast a material decline in its cash pool. The company, if it burned through its cash, could issue more shares, but that is the opposite of what Yahoo is currently working to do; the company is several billion dollars into a share repurchase program. You don’t spend billions buying shares off the public market only to issue more the next day. It’s a waste of time and money.

Therefore, barring some sort of mega purchase, the chance of Yahoo issuing a noticeable amount of stock — not, say, to its employees as a form of compensation — is nil. Therefore, excluding positive cash flow from operations, that $4.8 billion is all Yahoo has. That sounds dismissive, but compared to the hoards of Google, Microsoft and Apple, Yahoo is a relative pauper.

However, Yahoo retains another asset that doesn’t show up on its balance sheet the way you might expect, that is worth a multiple of its listed value, and will soon convert into a massive payout to Yahoo.

Thanks to an accounting system called the “equity method,” Yahoo doesn’t value its remaining 24 percent stake in Alibaba according to what its value would be in the market. Under the equity method, you can value certain stakes in other companies at non-market rates.

Alibaba intends to go public, and its CEO has recently stated it can do so whenever it wants. Also, a number of banks are raising their target valuation for Alibaba to $120 billion.

This is where the math becomes interesting. Twenty-four percent of $120 billion is $28.8 billion. Yahoo is worth, at current tally, just under $30 billion. Are investors therefore valuing Yahoo at essentially nothing more than its Alibaba stake? And if that stake is worth so much, how does that not affect Yahoo’s working funds?

Yahoo as a firm has obvious worth, so investors aren’t valuing it at zero. Instead, Yahoo values its Alibaba stake at all but nothing, at least in comparison to what its value may be when the Asian technology giant goes public. For example, in its first 2013 quarterly report, Yahoo stated that the value of its Alibaba stake was $453 million.

Here’s Yahoo itself on the valuation of its Alibaba equity:

The investment in Alibaba Group is being accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets, and goodwill, is classified as part of the investments in equity interests balance on the Company’s condensed consolidated balance sheets.

Therefore, for now at least, the real value of Alibaba is all but hidden from Yahoo’s books legally. Yet, Yahoo isn’t being tricky in this case; the equity method appears to be a very common form of accounting.

The question is now whether Yahoo intends to sell part of its Alibaba equity, unlocking its massive value, once the firm goes public. As it turns out, the company must. As the USA Today reported:

Yahoo owns just under 24% of the company, and is obligated to sell at least half of that based on a deal struck with Alibaba founder Jack Ma last year.

Therefore, assuming the $120 billion valuation for Alibaba, Yahoo will cash out $14.4 billion if it does sell the full half. Naturally, the taxes on that sale will be tectonic, but it will still shuttle billions into the firm in the form of cash.

Therefore, Yahoo’s current cash reserves are somewhat irrelevant, as they are more than high enough for the coming few quarters — barring four Tumblr-sized purchases — and by then Alibaba will have gone public.

So go crazy, Mayer. Your credit is good everywhere.

Top Image Credit: Luz Bratcher