The Alchemy of a Stock Market Wizard: April 2015

The law of one price (LOP) is an economic concept which posits that "a good must sell for the same price in all locations". The law of one priceconstitutes the basis of the theory of purchasing power parity and is derived from the no arbitrage assumption (see Intuition).

Within the first quarter Yahoo Inc. (YHOO) announced the intention of spinning off its remaining Alibaba Group stake:

January 27, 2015

“Today, along with our Board of Directors, I am proud and happy to announce a plan for a tax-free spin-off of our Alibaba holdings. Throughout my tenure with the company, we have worked tirelessly on a tax-efficient alternative that would maximize the value of our Alibaba investment for our shareholders. A tax-free spin off accomplishes this and delivers value directly and exclusively to our shareholders,” said Marissa Mayer, CEO of Yahoo. “Through share repurchases to date, we have returned approximately $9.7 billion of proceeds from Alibaba. Post-spin, using the closing price for Alibaba as of January 26, we will have returned nearly $50 billion dollars of value to our shareholders. This level of capital return is historic, especially for a company of our size. The plan announced today vividly demonstrates our commitment to being good stewards of capital and increasing shareholder value.”

“We have actively engaged experts in tax efficient structures over the past two years and have considered a variety of alternatives. We remain aligned with our shareholders and our plan is designed to achieve the most advantageous return of capital to Yahoo shareholders with the absolute highest probability of success,” said Ken Goldman, CFO of Yahoo. “The structure provides the investment community with clear visibility into the respective entities’ fundamentals, and also facilitates valuation transparency in SpinCo because Yahoo’s stake in Alibaba will constitute almost all of its value.”

The next major announcement for Yahoo, though minor in its net result, was the approval of an additional $2 billion share repurchase in which $726 million remains from the previous program.

Alibaba Group

(in $millions)

	Method of Valuation	Valuation
pre-IPO reporting Dec. 2013	Equity Method of Accounting	$1,018.13M
Post-IPO reporting Dec. 2014	available-for-sale equity security	$39,867.79M

source: 2014 10K

This reporting method changed in the latter half of the third quarter of 2014.

“As of the date of the IPO, the Company no longer accounts for its remaining investment in Alibaba Group using the equity method and no longer records its proportionate share of Alibaba Group’s financial results in the consolidated financial statements. The Company reflects its remaining investment in Alibaba Group as an available-for-sale equity security on the consolidated balance sheet and adjusts the investment to fair value each quarterly reporting period with changes in fair value recorded within other comprehensive income (loss), net of tax.”

Valuation

Partial Sum-of-the-parts(SOTP) Analysis

Alibaba Group Market Valuation $31,595.52M

as of 04/02/2015 @ $82.28

Yahoo’s Non-core Cash, Cash Equivalents & Investments:

as reported as of 12/31/2014

Cash & Cash Equivalents $2,667.91

ST marketable securities $5,327.41

LT marketable securities $2,230.89

Investments in Equity Interests $2,489.57

Total Non-core C, CE, & I $12,715.78M

Total non-core Yahoo! $44,311.30M

What the above analysis reflects?...

Going into Good Friday on the 2nd of April the market price for Yahoo Inc.(YHOO) closed at $44, valuing the core business of Yahoo at negative $3.33 per share. Based on the total value of its Alibaba Group worth $33.75 per share which Yahoo owns and intends to distribute plus continued ownership of the residual YHOO shares with the above non-core assets remaining worth $13.58 to the shareholder who decides to purchase Yahoo at $44.

What is not reflected in the SOPT analysis?...