Yahoo's Sale and Alphabet's X

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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Yahoo!?

Congrats everyone:

Verizon Communications Inc. (NYSE, Nasdaq: VZ) and Yahoo! Inc. (Nasdaq: YHOO) today announce they have entered into a definitive agreement under which Verizon will acquire Yahoo's operating business for approximately $4.83 billion in cash, subject to customary closing adjustments.

Here is the Tumblr post. I don't know what Verizon will do with Yahoo's stuff, but then, I don't really know what Yahoo did with it. "It's poetic to be joining forces with AOL and Verizon as we enter our next chapter focused on achieving scale on mobile," says Marissa Mayer, making me wonder what sort of poetry she reads. (Google also wonders.) 

The more interesting question is what Yahoo will do with itself. Yahoo the business will now be owned by Verizon, but Yahoo the public company -- which is an order of magnitude bigger than the business -- will still be floating around, under a new name, looking a bit lost. "After the sale, Yahoo shareholders will be left with about $41 billion in investments in the Chinese e-commerce company Alibaba, as well as Yahoo Japan and a small portfolio of patents," plus I guess the cash from Verizon. But "Marissa Mayer, Yahoo’s chief executive, is not expected to join Verizon, but she is due to receive a severance payout worth about $57 million," bringing her total compensation for about four years of work at Yahoo to $218 million.

But, wait, why sever her at all? I suppose she was brought on to run an internet business, and now they have sold the internet business, and she may not want to stick around to run essentially a giant trust fund full of Alibaba shares. ("These assets will continue to be held by Yahoo, which will change its name at closing and become a registered, publicly traded investment company," says the press release, though it doesn't give the new name. Aabaco?) Yahoo's description of its change-in-control severance plans for executives notes that "In April 2016, our Board of Directors amended the plans to clarify that a sale of all or substantially all of the Company’s operating business would constitute a 'change in control' for purposes of the plans" -- because, embarrassingly, before that amendment, a sale of Yahoo's entire business would not constitute a sale of "all or substantially all" of its assets, and so would not have triggered a change in control.

It seems to me that figuring out the right way to maximize the value of that trust fund for Yahoo shareholders would be a lot more fun than figuring out the right way to, like, put more ads on Tumblr. (I have some ideas!) It is also vastly more important: The potential tax bill on those Alibaba shares is more than twice what Yahoo is getting for its whole business, so getting out of those shares in a tax-efficient way offers shareholders a lot more upside than selling the actual business did. But now perhaps Yahoo will replace Mayer, who is the sort of person who wants to help a big technology company achieve greatness, with the sort of person who wants to manage the finicky tax and negotiating issues involved in helping Yahoo achieve a tax-efficient monetization of its Alibaba shares. Obviously it should have done that in the first place.

Elsewhere in tech.

Here's a fun story about X, which is the X in Alphabet's alphabet and the weird-moonshot lab at the company formerly known as Google. X works on risky long-shot projects, but it is also a division of a public company that recently reorganized to give shareholders more visibility into what it's doing with their money, so it can't just waste shareholder money pursuing any old dumb thing. So instead it tries to be efficient with shareholder money by giving employees bonuses for not working on dumb things:

“That’s the magic,” Mr. Teller said. “But they won’t do it. They will not raise their hands and say, ‘This project is just not what we should be working on,’ unless you start bonusing them, unless they can get a promotion for ending their project.”

(Mr. Teller is Astro Teller, X's "captain of moonshots," photographed wearing Rollerblades.) It's funny, when I worked in investment banking, I would pretty regularly raise my hand and say "This project is not what we should be working on," and I never got a bonus for that. That was just out of the goodness of my heart. I should have worked at Google.

One theory about X, "the one you hear most frequently, usually from competitors and venture capitalists, is that X is a giant public relations plan to distract regulators from Google’s search business, which is under scrutiny around the world." Giant advertising monopoly, bad; giant advertising monopoly with a guy on Rollerblades named Astro building life-saving robots or whatever, good. And then there is this:

X’s budget and head count are a secret, but shareholders’ perceptions about the division were aptly summed up by a poster board in its Mountain View, Calif., offices. It had a picture of a burning $100 bill followed by, “Investors think we do this.”

Wait is this one of those memes? Like, "what investors think we do" (burn money), "what my mom thinks we do" (scene from "Young Frankenstein"), "what I think I do" (picture of Thomas Edison in the lab), "what I really do" (TPS report scene from "Office Space"). Please tell me that's not a thing at Google. Is it next to the "hang in there kitty" poster? 

Speaking of stale memes, what inspired Elon Musk to label his post about the future of Tesla "Master Plan, Part Deux"? That joke is from 23 years ago, and only barely a joke. Anyway part deux of the master plan involves merging Tesla with SolarCity, building trucks and (small) buses, and of course self-driving shared cars. Has anything moved more quickly from weird sci-fi to boring inevitability than self-driving cars? Musk is like the admiral of moonshots. (He even builds spaceships!)

Uber, shareholders and antitrust.

We talk sometimes about the theory that institutional shareholders have an anti-competitive effect on public companies: Big diversified mutual-fund shareholders own every company in an industry, so they have no desire to see one company win at another's expense, and prefer weak competition and healthy margins. One objection to this theory is that you don't hear a lot about BlackRock or Vanguard meeting with corporate managers and demanding that they keep prices up and stop trying to win their competitors' business. On the other hand!

Uber Technologies Inc. investors have a message for management: It’s time to wrap up the costly fight in China.

Several institutional investors are pushing the ride-hailing company to ink a partnership agreement with China’s market leader Didi Chuxing, according to people familiar with the matter, stemming the billions of dollars Uber is spending to expand in the region.

Investors in Uber and Didi have discussed a potential deal, though the companies’ own executives would need to negotiate any truce, the people said, asking not to be identified as the discussions aren’t public. One Uber investor said he’s had more than 10 meetings and calls with Didi shareholders that want the companies to cut a deal. 

This does not quite fit the theory: Uber is a private company, not a public one, and the institutional investors involved here seem to be concentrated venture-capital investors rather than diversified passive mutual funds. Still it is a little unnerving to see shareholders telling companies to compete less. 

Elsewhere in shareholder democracy, companies are trying to defeat activists by getting retail shareholders to vote:

To win over those shareholders, companies are borrowing tactics from the political realm, where voter turnout may help determine who becomes the next president, said Eric Cantor, the former House majority leader who is now vice chairman at investment bank Moelis & Co.

“A retail investor is not too dissimilar to an unlikely voter who is not registered,” he said. “The universe of voters is what matters. If you expand the universe, you’ll be more successful.”

When Cantor went to Moelis, there was some controversy about whether he'd just be a famous name helping to bring in clients, or whether he'd use his Washington connections for nefarious purposes. But I feel like no one expected him to come in and fix corporate America's get-out-the-vote operation?

Is the market rigged?

Oh I don't know, but one specific sub-question that gets a lot of interest is: Do high-frequency trading firms make a lot of money by arbitraging the SIP? There is an official market-wide feed of prices and quotes (the SIP) that a lot of stock-trading venues use to price trades. But each exchange also offers a direct feed that is a bit faster than the SIP. And the worry is that high-frequency traders who get the direct feeds take advantage of regular people who get the slower SIP feed, by buying from them when the SIP price is lower than the "real" (direct feed) price and by selling to them when the SIP price is higher than the real price. This is an incredibly popular worry -- it's in my Bloomberg View colleague Michael Lewis's "Flash Boys" -- though I have never quite understood it.

Also it seems like a worry you could check: Just get a list of trade executions, see what the SIP price was at the time, see what the direct-feed price was at the time, and see if they were different, and if the differences were economically meaningful and biased in any particular direction. It's a little hard to do this, because exact microsecond trading data is hard to come by, but you'd think someone would eventually. And now some professors have looked into it and found that there's not much there: 

On a value-weighted basis, liquidity-taking trades in our sample that were priced at either the SIP NBB or the SIP NBO gained on average $0.0002 per trade by having their trades priced at the SIP NBBO rather than the Direct NBBO. Moreover, approximately 97% of trades within our sample occur at a time when the SIP NBBO and Direct NBBO match. This simple fact highlights the low probability that the choice of NBBO benchmark matters at all for liquidity-taking trades at the best ask or best offer. And even for the 3% of trades where SIP-pricing affected a trade’s profitability, less than 10% of these trades left a liquidity-taking trader in a worse position because the trade was priced at the SIP NBBO.

While liquidity-taking trades benefit on average when priced at the SIP NBBO, these trading gains come at the expense of liquidity providers who purchase (sell) shares at prices that are higher (lower) than reflected in the Direct NBBO. However, using the new timestamp data to explore trades surrounding these “mispriced” trades, we find virtually no evidence that these trades are the result of fast traders using market orders to “pick off” stale limit orders pegged to the SIP NBBO.

You can question the interpretation of the latter part a little; plausibly the liquidity-taker is more likely to be a SIP arbitrageur than a victim. But in any case, the authors say, "the magnitude of this effect is manifestly small."

Platinum Partners.

We've talked before about the mystery of Platinum Partners, which:

  1. Is one of the best-performing hedge funds in the world, returning about 17 percent per year in its main fund with no down years; but 
  2. Nonetheless has suffered heavy withdrawals, is involved in an alleged bribery scandal, has borrowed a lot of money, and has now suspended redemptions and announced plans to close.

The central mystery is: If your money is in the best-performing hedge fund in the world, why are you withdrawing it? There is an obvious answer, though that doesn't mean that it's right, just that it's obvious. It has apparently occurred to the federal agents investigating Platinum. Here's the Wall Street Journal:

An issue for investigators now, according to those familiar with their probe, isn’t just alleged bribery but the integrity of Platinum itself: It is also a fraud investigation.

Investigators are examining whether "Platinum had been paying some reported investment gains to exiting investors with money from incoming ones" and "whether Platinum misstated values of some holdings." "It is incorrect to imply that past payouts to investors were specifically made with new allocations," says a spokesman. And how reassuring would you have found this?

In pitching that fund, Mr. Huberfeld would pull out a sheet of performance figures and point to the sole down month. “You see? We lose,” he said, according to one investor. “You see? We’re real.”

One, if you were just making up performance numbers, you could always throw in one made-up down month for verisimilitude. Two, is it normal for a hedge fund pitch to include the words "we're real"? Shouldn't that just be a given?

Hamptons parties.

If a genie came to you and offered you the chance to have the New York Times print a business column defending a party that you threw, would you take it? On the one hand, I mean, if you need to defend your party in the press, it probably got pretty out of hand, perhaps with some negative consequences for your life. On the other hand: good party!

Anyway here's Robert Frank with Brett Barna's defense of his "Sprayathon" party, which got Barna fired from Moore Capital and in a fight with Omar Amanat, the recently indicted (why not!) owner of the house where he threw the party. Barna "does regret some aspects of the party, like the dwarfs dressed in red-white-and-blue suits carrying champagne guns," as one does. But:

“If you looked at photos from other parties held that weekend in the Hamptons,” Mr. Barna said. “You would find plenty that were a lot worse.”

Is that true? Were you at one? If so, please send pictures.

People are worried about non-GAAP accounting.

Here is Gretchen Morgenson on a new rule from the Financial Accounting Standards Board that will reduce the (accounting) cost of stock-based compensation under U.S. generally accepted accounting principles. Stock-based compensation is a famous bugbear of the people-are-worried-about-non-GAAP-accounting set: GAAP requires that it be expensed, companies try to report non-GAAP earnings that exclude the cost of stock-based compensation, and worriers worry that those non-GAAP earnings are misleading. 

The new rule -- which has to do with recognition of a tax benefit from stock options in earnings -- is, I suppose, a tiny compromise. You still have to expense stock-based compensation in your GAAP accounts, but now the expense is a little less. It's a good reminder that GAAP accounting is not a transparent reflection of absolute reality. "Stock-based pay isn't a real expense," say companies. "Of course it is, come on," say critics. "It is, but it's a smaller expense than you thought," says FASB, puzzling everyone.

People are worried about unicorns.

Ehh, I don't know. "Aspire to Be Like a Cockroach, Start-Ups Told" is the headline here, which is a lot less flattering than "unicorn." 

People are worried about bond market liquidity.

This is now over a week old, but here's a Bloomberg Markets interview with Henry Kravis in which he mentions you-know-what:

What worries me is, if there’s ever a major run on credit funds—high-yield funds, let’s say—who’s going to buy this debt? The banks used to be the ones that made the markets and had very big inventories, and they could take it on. Today, if they’re even still in the business, they’re down to a third of what they were. And that worries me, because I think we have put certain things at risk when we didn’t need to. In the U.S., I think regulation may have swung too far now.

I can't believe I missed it earlier.

Me recently.

I wrote about the front-running case against two HSBC currency traders last Wednesday.

Things happen.

Has Wall Street Been Tamed? Pointing a Finger at the Fed in the Lehman Disaster. The DAO got its hard fork. Payday Loan Limits May Cut Abuse but Leave Some Borrowers LookingThe Battle Heats Up in Person-to-Person Payments. Cash-Strapped Governments Enjoy a Windfall in Low Borrowing Costs. Investors Want to Have Their Corporate Bonds and Eat Them Too. US groups hoard cash as uncertainty grows. Investors Weighing Rescue of Italy’s Struggling Banks. GMO's Mean-Reversion Strategy Is Tested in Today's Market. If a $2 Trillion Saudi Aramco Goes Public, Will It Withstand Outsider Scrutiny? Herbalife and the end of the world. Nintendo Slumps By Most Since 1990 on Dashed Pokemon Go Hopes. Best-Paid CEOs Run Some of Worst-Performing Companies. A profile of the Roosevelt Institute. Morgan Ricks against full-reserve banking. "Men ages 20 to 34 and women in their early 20s had significantly weaker hand grips than young people tested in 1985." The Mall of the Future Will Offer Dinner, Movies, and a Colonoscopy. Bourbon Burgel (?). Edible insect lobbyists. Safety mountain lions. "Fashion experts immediately praised Sale for his actions."

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

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net