Hook Stock and Bank Breakups

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!?

Yahoo is selling Yahoo to Verizon (which also owns AOL), raising two key questions:

  1. What will become of the Yahoo that is sold to Verizon, and
  2. What will become of the Yahoo that isn't? 

The first question is a puzzle; here is Paul Ford:

Google has search. Facebook has the social network. Twitter has the angry social network. Microsoft has the office. Apple has user experience. Amazon has commerce, publishing, and the cloud. But what in God’s name does VerizAolHoo have?

It has ... Tumblr? And Yahoo Finance? And your "two oldest inactive email accounts"? Ford thinks that Verizon is putting together a new sort of conglomerate. "It used to be that conglomerates were pretty obvious—one might own coffee farms, jet engine manufacturers, and a department store, and they had acronym-names like ITT or powerful names like Consolidated Undulating Prong." Now they have names like Verizon, and smush together a variety of unrelated but internetty things. 

The second question is actually pretty easy, because Left-Behind Remainder Yahoo (not its real name?) will consist mostly of a big pile of Alibaba shares, and it will trade at a big discount to the underlying value of those Alibaba shares, mainly for tax reasons. (There are also some Yahoo Japan shares, and some patents.) So the telos of Left-Behind Remainder Yahoo will be to eliminate that discount. If your job is to run Verizon AOL Yahoo, I don't know what to tell you; I have no idea what you should be working on, and you probably don't either. But if your job is to run Left-Behind Remainder Yahoo, your goal is very straightforward. You want to make LBRY worth as much on the outside (its own stock price) as it is on the inside (the value of its pile of Alibaba stock).

How do you do that? Here's Bloomberg News:

Instead of trying to unload the shares, the new investment company now plans to hold them potentially indefinitely with “no current intent’’ to sell those in a taxable deal, Yahoo director Tom McInerney said on the call. This means Remain Co.’s stock price should reflect the lack of expectation for a transaction, he said. It is possible, though, for a buyer to come in and buy the company without incurring a “corporate-level tax,’’ he said.

He didn’t rule out a so-called hook stock-type transaction, where Alibaba would buy the investment company and thereby own a subsidiary that held its own shares. Such a setup would be contingent upon the Chinese internet giant showing interest, followed by Yahoo’s management team returning said interest. In short: It’d be very complicated.

No it is dead simple; we talked about it ages ago. The only complications -- but they're big ones -- are that Alibaba has to want to do the deal, and you have to negotiate the price. Loosely speaking, Left-Behind Remainder Yahoo should be willing to sell itself for, like, 66 percent of the value of its underlying Alibaba shares (because if it sold them in a taxable transaction it would get about 65 percent), while Alibaba should be willing to pay, like, 99 percent (because if it bought back its own shares in the market it would pay about 100 percent). So you have to fight to split up the benefits of that deal. And of the two parties, Alibaba would seem to have more negotiating leverage. Alibaba is a giant company with its own business to worry about. Left-Behind Remainder Yahoo is just in the business of sitting by the phone, waiting for Alibaba to call. 

A third question is, what will become of Marissa Mayer? It's a little unclear to me whether her plans involve going with Yahoo to Verizon, or staying with Left-Behind Remainder Yahoo, or just taking a nice break. Mayer's tenure at Yahoo has obviously been controversial, which on the one hand is a little harsh on her, but on the other hand she was well compensated for it. Dan Primack looks back:

I felt that she was in a no-lose situation: She was taking over a ship that everyone believed was sinking. If she turned things around, then she’d be hailed as a business genius. If she didn’t. . .well, of course, it sunk. Kind of like what I argued when Cerberus bought Chrysler.

This is not, however, the way things played out in the court of public opinion. A lot of that is on Mayer for a management style that rubbed certain people the wrong way. She was a first-time CEO. But part of the blame should go to Yahoo PR for letting her appear on the cover of any magazine that would have her (the higher the profile, the steeper the fall). And, to be sure, her ridiculously large compensation package annoyed shareholders. But, in the end, I stand by my original sentiments. This was a 3-alarm fire that Mayer failed to put out, rather than one she started.

Kara Swisher is a skeptic. I don't know. I am sympathetic to the idea that turning around Yahoo was impossible, but if it was, why pay Mayer $219 million not to do it? Like, I would have not done it for $5 million. People have criticized the Valeant compensation scheme, for obvious reasons, but it seems like it would have been the right approach here. Pay Mayer $1 million a year or whatever to cover her mortgage, and if she actually adds tens of billions of dollars to the value of core Yahoo, give her hundreds of millions of dollars of that value-add. And if not, not. If you're hiring someone to throw a Hail Mary, you want to pay her for completing it. 

Also, if turning around Yahoo was impossible, what is Verizon going to do with it? 

Elsewhere, Farhad Manjoo says Mayer wasn't bold enough. Bloomberg's Brad Stone blames Yahoo's "Nice Guy Founders." Bloomberg Gadfly's Shira Ovide has some lessons. Here are some analyst reactions.

Break up the banks!

Here is Andrew Ross Sorkin on the puzzling and probably not-quite-heartfelt bipartisan consensus about bringing back Glass-Steagall and separating traditional banking from investment banking. "So what’s the chance that the law actually comes back," asks Sorkin, and answers "very small," which is good enough for me. I tend to be a Glass-Steagall skeptic: The mixing of commercial and investment banking seems to have had very little to do with the last crisis, no one can quite explain how it would prevent a new one, and it would be a real pain to break up all the banks. The one thing I will say for it, though, is that the Glass-Steagall hard line between commercial banking (deposits, loans, etc.) and investment banking (trading, etc.) is probably a more sensible line than the Volcker Rule line between market making and proprietary trading. There is every reason in the world to combine customer-facilitation and "proprietary" trading in one entity, but there's no particular conceptual reason why that entity should be a deposit-taking bank. 

Elsewhere, Citigroup and HSBC are shrinking by getting out of a lot of countries:

“Banks are figuring out that providing every product and every service to every client in every country was just wrong,” said Vikram Pandit, who led Citigroup from 2007 to 2012 and used to tout what he called the company’s globality. “So they are unwinding and shedding assets. We’re not close to being done.”

Hedge funds.

"How Does This Hedge-Fund Manager Make So Much Money," asks the headline of this Bloomberg article, and the manager obligingly answers:

“I’ve got a spreadsheet that did the calculations,” Meyer, 49, says of his system. “And then I just got coders to code it, so that the computer’s coming up with it, ’cause I can’t, I couldn’t, manually do something like that.”

See, there's a spreadsheet. The manager is Joseph A. Meyer, the fund is Arjun LP, the annual returns are "13 percent, 24 percent, even 91 percent since 2013," and it's gone through three different auditors in that time. Also one ongoing Georgia securities division enforcement investigation, though "Meyer’s legal counsel, Parth Munshi, says it’s all a misunderstanding." Arjun has a ten-year lockup (and if investors "exit early, Meyer keeps half the principal"), but also offers a guarantee that investors will never lose money. It does not, however, offer audited financial statements. Investors say things like "I understand it in general, but I probably don’t understand it completely," and "How many hedge-fund managers can you get to call you back?" Meyer says things like "All it does is look at the last trade and calculate trades that would be equivalent of, 'What if this security increases 50 percent in value in the next three seconds.'" What if, indeed.

Blockchain blockchain blockchain.

Look this is two months old but I don't care, just look at it:

Maybe we could ... deliver the mail ... on the blockchain. The mail. We could put it. On the blockchain. Yes. Do you think I can get a big gold chain with the words "block" and "chain" linked into it, and then wear it around my neck? Could I buy it with bitcoins? Anyway that gorgeous graphic is the cover page to this report about post-office blockchains:

The U.S. Postal Service Office of Inspector General (OIG) contracted with Swiss Economics, a consulting firm with interest and expertise in blockchain technology, to better understand the technology and its features, as well as identify areas of potential interest for the Postal Service.

The recommendations are actually much more reasonable than the cover page lets on (it's not actually about delivering mail on the blockchain), but still, I feel like it must be a pretty good business to wander around D.C. shouting "blockchain" until some government agency commissions you as a consultant and pays you to write a report like this. You're unlikely to top this clip art, though.

Elsewhere, here is "How and why we built an internet connected solar panel: Blockchains, meet internet of things," and you might think, oh great, blockchains for solar power, but this actually strikes me as a pretty neat idea. We talked the other day about fake biofuel: Government regulations make it valuable to use certified biofuel, so people pay for biofuel certificates, but then other people just make up those certificates. Something similar exists for solar power:

This is where renewable energy certificates (RECs) come in. RECs are proof that one megawatt-hour (enough to power an average house for about a month) of renewable electricity was generated by someone and put onto the grid. Solar power plants (or in some cases small businesses with rooftop solar) can issue RECs and sell them to utilities who then “retire” them, or count them toward the renewable energy they’re required to deliver.

Today RECs are tracked electronically in proprietary, opaque, centralized databases, accessible only to large producers of electricity and utilities. Even as the photovoltaic hardware to generate energy in a more distributed way becomes cheaper and more widely available, the systems that let panel owners seamlessly create and sell RECs are still inaccessible.

So the idea here is to connect solar panels to a blockchain (the Nasdaq Linq platform) so they can automatically generate verifiable and tradable solar certificates. That ... seems smart? 

Banned business book!

Here's a story about a business book that has been suppressed by the U.S. government because it is too dangerous to read. Okay no that's not true, it has been suppressed for copyright reasons. But isn't it fun to pretend? Don't you sort of want to live in a world where mid-level executives are surreptitiously passing around samizdat copies of leadership manuals? Handing on Porter's five forces via oral tradition because that information is too explosive to write down? Learning guerrilla marketing techniques in hidden jungle camps? Risking years in the gulag just for a minute with the life-changing wisdom of "Who Moved My Cheese"? Anyway this book is called "Fans! Not Customers: How to Create Growth Companies in a No Growth World," and if you have an illicit copy, please photograph every page and Snapchat it to me. (Oh, wait, "the book is still available for purchase on Amazon," never mind.)

Elsewhere in, I don't know, cheese, here's a story about LinkedIn:

A couple of Rhys Wilson’s customers recently asked about his expertise in “fly fishing,” a listing that reeked of payback. Mr. Wilson, a manager at a software startup, had earlier endorsed a friend’s skill in the use of “lubricants.”

Profile pranks, also known as endorsement bombing, sprang from the LinkedIn feature intended to highlight laudable skills. Instead, some people fluff the digital profiles of friends with skills of no particular relevance. Unless, of course, “round tables,” “cheese” or “chairs” is your thing.

True story, my LinkedIn profile lists skills in "bloviating" and "footnotes" and nothing else. Also please don't add me on LinkedIn. 

Paying for data.

I enjoyed this proposal from M. Todd Henderson "to create a market for corporate data to be bought and sold":

The SEC could mandate that corporate information be publicly released at a particular time, say, 2 p.m. Then it would permit companies to offer early peeks—say, starting at 1 p.m.—to anyone willing to pay. Firms could charge a subscription or sell early information a la carte, depending on market demand, and keep the proceeds.

This will never happen; we'll see legal markets in human organs before we see legal markets in corporate information. But all of this seems completely right to me:

The SEC worries that it would be unfair to ordinary investors to charge for early access. But creating a brief “pros-only” period would actually work to their advantage. Average Americans, who cannot compete with today’s high-speed traders, would know to stay out of the markets during these short periods. So would index funds, which try to avoid being picked off by savvy information traders.

There are also broader advantages: Laying bare the unavoidable fact that ordinary investors cannot beat the pros using corporate news would encourage a long-term perspective among corporate ownership.

But much of our system of securities regulation is founded on the notion that ordinary investors should be able to beat the pros using corporate news. I like to compare this to the regulation of dentistry, where professionals are expected to have better tools and information than amateurs. That idea has never really caught on in the securities markets.

People are worried about unicorns.

One worry that people have about unicorns is that they can't get up-to-the-minute market capitalization for unicorns the way they can for public companies, but that will change:

Now Equidate, a market for trading shares of private companies, plans to lift the veil on some of that information. The company, based in San Francisco, said on Monday that it would make a host of data about private companies free and open to the public, drawing from corporate filings that include the prices that investors have paid to invest in the companies. Equidate also plans to release tools that shareholders can use to calculate the value of their private-company stock holdings.

You can build a private market that is arbitrarily close -- in liquidity, disclosure, price discovery, governance, investor access, or whatever other metric you want -- to the public markets. Eventually people will be complaining about high-frequency trading in Uber stock.

Elsewhere here is Kara Swisher on tech journalism:

I think where it falls down is in criticizing this group of people. First, they’re not used to criticism, and unlike, say, a banker who sort of knows they’re kind of sketchy, people in Silicon Valley really think of themselves as world-changing, good people: “We know best because we’re so smart. And obviously we’re rich, so we know best.” 

That is the standard view of Silicon Valley, but I like the characterization of bankers as being self-aware. Certainly when I worked as an investment banker I knew I was kind of sketchy. It was rather a point of pride for me, honestly.

People are worried about bond market liquidity.

"Chai House Chat: lack of bond market liquidity is ‘new normal,’" is the headline here, and you are telling me. Also yesterday's big "Has Wall Street Been Tamed" Bloomberg article had a section about Amar Kuchinad, a former Goldman Sachs managing director who left for the Securities and Exchange Commission as a senior policy advisor, and who then left the SEC to found Electronifie, one of the many electronic bond trading platforms:

“I saw market participants come to Washington and tell the agency, ‘This is going to crush liquidity in the corporate bond market,’” Kuchinad says.

He drew another conclusion: The time had come to provide a digital alternative that could match buyers and sellers without the need for dealers.

It's a good revolving-door story: An SEC official helped work on regulations that made it harder for banks to compete in bond trading, and then left government to make money in the space that was newly cleared of competition.

Things happen.

Fed Prepares Action Against Goldman Sachs in Leak Case. Bear Stearns Withheld Details on Financial Condition, Judge Says. The Lender of Last Resort and the Lehman Bankruptcy. AB InBev ups SABMiller offer to £79bn after sterling drop. Pension Returns Slump, Squeezing States and Cities. It's Not a Search for Yield but a Scramble for Safety. Active fund managers face more pain — Moody’s. This Is Why Libor's Moving Higher. Musings on the Implications of a Higher Dollar Libor. Peter Henning is even more skeptical than I was about the HSBC foreign-exchange front-running case. New Guidance on the Impact of SEC Beneficial Ownership Reporting and HSR Act Notification Regimes on Shareholder Activism and Engagement. In the Hamptons, Few Party-Goers Will Admit to Playing Pokemon. Rampaging Mall Robocop May Have Been Falsely Accused. Starbucks Is Now Letting Baristas Wear Fedoras.

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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