Yahoo, Anbang, Bear and Unicorns

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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The thing about Yahoo's plan to sell itself is that it is not a plan, and it is not to sell itself. It's not, like, "here is what's for sale, please submit your bids in two weeks." It's ... like ... there's some stuff ... and if you want to buy part of it ... you can tell Yahoo what you want to buy ... and how ... or whatever. You want to buy Yahoo's core business? Submit a bid. You want to buy part of that business? Sure, fine, submit a bid. You want to buy Yahoo's stake in Yahoo Japan? Why not. You want to buy the Alibaba stake that started all of Yahoo's contortions? I mean, maybe, but make sure to include your tax analysis as an appendix to your bid. Anyway preliminary bids are due April 11:

In letters sent to possible buyers in recent days, Yahoo advisers asked them to submit proposals for their bids, including what assets they hope to acquire and for what price. Some buyers may be only interested in Yahoo’s core Web business, or pieces of it, while others may also propose bids for stakes in Alibaba Group Holding Ltd. or Yahoo Japan.

The company set an April 11 deadline for the bids, one of these people said.

This choose-your-own-adventure approach to selling the company is not exactly uncommon -- there's a reason companies say they are "exploring strategic alternatives" rather than just "trying to sell themselves" -- but, in Yahoo's case, it is hard not to read it as a symptom of the company's disorganization and ambivalence. Yahoo already had a plan to accomplish its most important task, separating the Alibaba shares from core Yahoo, but the Internal Revenue Service (itself rather ambivalently) killed that plan, so we are now on, at least, Plan B. And Yahoo's management is working to turn around its core business, while at the same time working to sell it. "The Board is thoroughly committed to exploring strategic alternatives while simultaneously supporting management and the employees in their implementation of Yahoo's strategic plan," said Yahoo last month, ambivalently. "There are strategic alternatives that could help us achieve the separation, while strengthening our business," said Marissa Mayer, even more ambivalently. Also there is a proxy fight!

I would not want to be a junior banker or lawyer working on this sales process. No, who am I kidding, I worked on a similarly convoluted sales process as a junior lawyer, and I loved it, though I didn't sleep for a year. It might be fun to be a bidder in the process. Maybe I'll lob in a bid of $50 for Tumblr to see if it gets me into the next round.


Elsewhere in mergers and acquisitions news, "Starwood Hotels & Resorts Worldwide Inc. received a higher $14 billion takeover offer from a group led by China’s Anbang Insurance Group Co., raising the stakes for Marriott International Inc. to counter a second time to salvage a merger that would create the world’s biggest hotel operator." The Wall Street Journal has a delightful article about Anbang's history and ownership. The article starts off, sensibly enough, by parsing the "Background of the Combination Transactions" section of the Starwood/Marriott merger proxy, always the best section of any merger proxy, in which we learn that Anbang (referred to in the proxy as "Company F") was involved in Starwood's sale process last year, but kept melting away when it was asked about its financing:

On November 3, 2015, Mr. Aron, Mr. Mangas and representatives of Citi and Lazard met with the Chairman of Company F, who again made a preliminary non-binding indication of interest for an all-cash acquisition of Starwood at a price of $83 to $86 per Starwood share. Company F, which had not performed a detailed diligence review of Starwood, withdrew its indication of interest before the meeting concluded after Company F was informed that it would not be practical for Starwood to let Company F proceed in the process without a written offer with specific financing plans.

Now the financing is a bit firmer, but Anbang's ownership remains mysterious:

Nine of Anbang’s new investors were registered in Sichuan province roughly within a month of each other, in December 2012 and January 2013. Several of the Beijing companies which invested in Anbang in 2014 at one point listed the same contact email address, the online corporate registry records show. Emails to that address went unanswered, and mobile phones for the three companies listed in the Beijing corporate registry were turned off.

Remember 2008?

John Carney did some digging in the recently released pile of documents from the Financial Crisis Inquiry Commission and found something pretty cool: the source of the rumor, in March 2008, that Goldman Sachs wouldn't "accept the counterparty risk of Bear Stearns," which helped spark the panic that led to Bear's downfall. Apparently the source was Kyle Bass of Hayman Capital Management, who had some credit derivatives with Bear Stearns and tried to novate them over to Goldman Sachs. Goldman did in fact say no -- "Our trading desk would prefer to stay facing Hayman. We do not want to face Bear" -- though it's not clear whether that is because Goldman did not trust Bear's credit, or just because "Goldman had received so many requests for Bear Stearns-facing novations that its traders were running up against rules limiting the bank’s exposure to a single firm." Perhaps there is not much difference between those two explanations.

If you were Bass, what would you do in that situation? The first thing I'd do is, you know, keep pestering Goldman; Bass seems to have done that, and "shortly afterward, Goldman sent another email agreeing to accept Bear as the counterparty." But the other thing I would probably do is keep the news to myself. Presumably Bass wanted to move his trade from Bear to Goldman because he was worried about a run on Bear that would make it impossible for Bear to pay him back. Obviously that run was already ongoing -- he was part of it -- but publicizing Goldman's lack of confidence in Bear couldn't have been good for anyone else's confidence in Bear. Bass, though ... decided to go to CNBC with it? The FCIC wrote up an interview with Thomas Marano of Bear, who had called Bass to ask why he wanted to novate:

“I reached out with a Bear salesperson to Kyle, and he indicated that he attempted to novate to Goldman and that he shared a conversation about Goldman not wanting to novate with David Faber of CNBC. I said it’s all over CNBC, and he said that he couldn’t believe that David Faber put that all over the air. He was shocked that it was out there,” Mr. Marano said, according to the memo.

Bear Stearns was gone by the weekend. I suppose I am all for investors calling up journalists at the slightest hint of trouble at a major financial institution, but still, I don't quite understand Bass's thinking here.


I said the other day that the problem for Valeant is that it is "walking back every aspect of its McKinseyishness, all at once, which seems like uncharted territory." So for instance the exposure of Valeant's accounting problems and aggressive pricing is making it hard for Valeant to continue to be as acquisitive as it used to be. But the past acquisitiveness also makes change harder. Here is Bloomberg Gadfly's Max Nisen on Valeant's deal last year to buy Sprout, which makes Addyi, the "female Viagra." The problem with the Sprout deal is that it included royalty payments for the former Sprout shareholders based on Addyi sales, which creates principal-agent issues, which the merger agreement attempted to solve by requiring Valeant to invest certain amounts of money and people into developing and marketing the drug. The Sprout shareholders are worried that the quieter, less aggressive, new-look Valeant may not be fulfilling its obligations. On the other hand, they're also worried that the new-look Valeant is still a bit too much like the old Valeant: A group of Sprout shareholders complained that "Valeant predatorily priced Addyi at $800 a month even though Sprout had established a price point of approximately $400 a month for the drug based on market research." If the price is too high for insurers to cover, then that will presumably be bad for sales, and for Valeant's new look more generally.

Elsewhere in Valeant Schadenfreude, "Valeant Pharmaceuticals International Inc.’s outgoing chief executive officer, Michael Pearson, was subpoenaed to testify at a hearing next month by a Senate committee investigating drug price hikes." Peter Eavis writes that "Valeant’s accounting is likely to remain at the heart of the debate about the company’s fate." And the Sequoia Fund, Valeant's largest shareholder, has had six consecutive months of investor outflows.

People are worried about unicorns.

Here is an interview with Chamath Palihapitiya, an early Facebook employee and now a venture capitalist at Social Capital, who is critical of today's flock of unicorns:

The reality is, great companies can go public in any market. When we talk about the I.P.O. slowdowns what we’re really saying is that there really just aren’t that many good companies being built. We need to divorce ourselves from venture capital as an occupation and focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven’t done enough of that, and the result is that most of the things we’ve funded are mostly 

And then he says a bad word, but you get the idea. More notable than the uniskepticism, perhaps, is Palihapitiya's recollection of the catering in the early years of Facebook:

Because I can tell you what it was like at early Facebook: the food was terrible; we’d ship in lunch and probably two to three times a week the lunch had maggots in it. But we were there because we believed, and it didn’t matter.

Will Alden asks reasonable questions:

First of all, how did the maggots get into the lunches? Did they come from a Palo Alto restaurant? If so, why did Facebook employees continue to order food from there?

A Facebook spokesman commented to Alden, "lol." Perhaps the maggots were only metaphorical, like the unicorns.

No hahaha just kidding unicorns weren't just metaphorical, they really existed, in Kazakhstan, as recently as 29,000 years ago, though those looking for enchantment in their unicorns will perhaps be disappointed:

The real unicorn, Elasmotherium sibiricum, was shaggy and huge and looked just like a modern rhino, only it carried the most almighty horn on its forehead.

And it never raised money in the private markets at a $1 billion valuation, because its existence long predated the use of money, never mind venture capital. Here is the paper announcing the recent Elasmotherium find. Incidentally, have we talked here about Adrienne Mayor's "The First Fossil Hunters"? It is a wonderful book, explaining how the cryptozoology of ancient myth could have arisen from, more or less, Greeks finding dinosaur bones and declaring them dragons. Or, I suppose, finding Elasmotherium bones and declaring them unicorns.

Those looking for enchantment in their unicorns have also been disappointed, over and over and over again, by Theranos, the Blood Unicorn (Elasmotherium haimatos). Here, have some more Theranos disappointment:

A study by researchers at the Icahn School of Medicine at Mount Sinai showed that results for cholesterol tests done by Theranos Inc. differed enough from the two largest laboratory companies in the U.S. that they could throw off doctors’ medical decisions.

Theranos disagrees. Elsewhere: "There is no Uber economy, there is only Uber."

People are worried about stock buybacks.

Here is a good puzzle of causation:

Companies that haven't spent a single dollar on stock buybacks have performed better than those that have, according to an analysis of FactSet indexes since 2005.

At the most basic level, the companies spending the most on buybacks in the S&P 1500 appear to simply perform worse as a group.

So is that:

  1. Buybacks are less productive than investments in business, so companies that choose to spend money on buybacks fall behind companies that choose to invest in their businesses; or
  2. Companies with attractive investment opportunities take them, while companies with less attractive investment opportunities just give the money back to shareholders?

This is the core question of buybacks. It seems to me that people who are worried about them tend to choose option 1, and to assume implicitly that all companies have the same set of investment opportunities: Any company can just Invest In Business at an X percent return, or Buy Back Stock at a Y percent return, and X > Y in the long term, so stop buying back stock, you short-termists. (We talked yesterday about Gretchen Morgenson's argument that Yahoo, whose business the market judges to have negative value, should have pumped more money into that business and less into buybacks.) I suspect that different companies have different opportunities, and that mature cash-flowing companies without a lot of exciting growth opportunities should probably give that cash to their investors to invest in growth opportunities elsewhere.

Elsewhere, I got into a Twitter canoe yesterday with Felix Salmon, Nassim Taleb, Josh Brown and others about the shrinking stock market. Here is a Bloomberg chart of the S&P 500 Index's market capitalization per point over the last 15 years:

(Here's a chart of the S&P 500 level and market cap as separate series.) As you can see, the market cap per point has been declining in recent years, which I suppose may have something to do with buybacks.

People are worried about bond market liquidity.

Most of the time, bond market liquidity worries wash up on my shores naturally, but I confess that when I am short of worries I sometimes do a Google News search for "bond market liquidity" and see what I get. That search is coming up pretty empty these days. It would be weird if people stopped worrying about bond market liquidity almost exactly a year after I started talking about those worries. But here is Bloomberg Gadfly's Lisa Abramowicz on hedge funds buying Treasuries.

Me yesterday.

I wrote about Andrew Caspersen, the PJT Partners executive accused of a pretty bare-bones investment fraud. His arrest, you will not be surprised to learn, has not been good for PJT's stock. And here is the story of Caspersen's "gilded" background.

Things happen.

Deutsche Bank to Add 100 Equity Traders. BlackRock Joins Pimco Warning Investors to Seek Inflation Hedge. Hedge fund Luxor Capital alters terms of withdrawal plan. Millennium Said to Hire Credit Suisse's Jain for Co-CIO Role. Finance blogger wisdom: peak robo-advisor? Banks Ordered to Defend Suit Claiming Benchmark Rate Rigging. Are Wholesalers Breaching Best Execution Duties? JetBlue, Alaska Air Bidding for Virgin America. Federal Judge in Puerto Rico Calls Walmart Tax Unlawful. Lin-Manuel Miranda: Give Puerto Rico Its Chance to Thrive. Ranking America’s industries by profitability and tax rate. Nordic Corporate Governance and Concentrated Ownership. Canarsie hedge fund exec faces 5 years prison for fraud: U.S. judge. "Previously convicted criminals discount the future at a rate of 0.74." The Supreme Court should have more defense lawyersTricia Lockwood on Trump. Can Kissing Your Dog Make You Sick? Tortoise takes bath. Harvard Video Gamers Booted from Tournament for Cheating. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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