Naspers Only Flips


Naspers exits with a buyout from Amazon, but still holds on to Indian e-commerce site, Flipkart. Before a competing bid from Emaar Malls, Amazon was rumoured to haved offered $650 million for which would have meant about $236 million for Naspers, who owned thirty-six percent of Naspers may not have the same luck with Flipkart.

Buying tech startups has been Naspers’ business model since it found fortune in Tencent; an early investment in Tencent now represents about one third of Naspers’ market value. Naspers’ fifteen percent of Flipkart is currently worth $3 billion based upon a Wall Street Journal valuation. After recent troubles, Flipkart is looking to raise more money, but a public offering or sale seems far away.  


Petro-Rich Gulf States Move Upstream to Tech

Petro-rich Gulf states move closer to the wellhead, not of oil, but silicon. Qatar’s sovereign wealth fund will open a San Francisco office later this year or early next year. Sheikh Abdullah Bin Mohammed Bin Saud Al Thani of the $335 billion Qatar Investment Authority made the announcement in London this week.

Qatar will join Singapore’s Temasek in being closer to the action and better able to source deals. As the Gulf states diversify from oil and natural gas, Qatar stepped up its tech investments such as purchasing a stake in Uber in 2014. Not far beyond was Saudi Arabia who invested in Uber just last year.

Saudi Telecom’s Abdulrahman Tarabzouni greased the deal between Uber and the Kingdom. Mr. Tarabzouni, formerly of Google, is also interested making the switch from oil to silicon. In a recent Bloomberg interview, Mr. Tarabzouni said he wants to find people in Silicon Valley to partner with Saudi Telecom’s new venture capital arm.

Before Qatar and Saudi Arabia, Abu Dhabi had already come to Silicon Valley with its AMD investment in 2007. Later on, Mubadala, one of Abu Dhabi sovereign wealth funds, established Globalfoundries in 2009 after its divestiture from AMD. Globalfoundries has expanded through acquisitions, most recently with the purchase of IBM’s silicon operations in 2015.

Gulf countries must be heeding the warning of former Saudi oil minister, Sheikh Zaki Yamani, who said… “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil..”


What Amazon’s Win Means for Facebook

Amazon just won in Tax Court against the IRS. If Amazon would have lost, then it would have owed about $1.5 billion in taxes. The Amazon case is similar and could provide insight into one that Facebook is currently contesting with the IRS. In the Facebook case, if the IRS wins, it could collect between $3 to $5 billion in taxes from Facebook.

More importantly, the IRS is contesting a tax strategy common in the tech field. A company such as Amazon establishes a foreign subsidiary somewhere with low tax rates. Amazon then transfers intellectual property (IP) to the foreign subsidiary and in exchange, the foreign subsidiary makes royalty payments to Amazon.

Amazon pays taxes on the royalties received from the foreign subsidiary. The royalty payments in turn depend on the value of the IP transferred. A higher valuation mean higher royalty income for Amazon and more taxes to be paid. This is what the IRS wants, so it valued the IP Amazon transferred at $4 billion or sixteen times larger than Amazon’s estimate.

The Tax Court didn’t agree with the IRS’s valuation and sided with Amazon, and now Facebook faces the same issue. Facebook established its foreign subsidiary in Dublin, Ireland and also transferred IP which Facebook valued at $4 billion. Unfortunately, the IRS valued Facebook’s IP at $14 billion or three times higher than Facebook’s estimate.

With the higher valuation, the IRS is looking for more royalty income and hence more taxes from Facebook; that will only occur if a Tax Court agrees with IRS’s valuation method, something which did not happen in the Amazon case.


Uber is Greek

Uber recently has had more drama than a Greek play. And with a $70 billion valuation, Uber has also become a Greek God, holding the aspirations of many: venture capitalists, angels, sovereign funds, and others. Many still question the valuation of Uber’s asset-like, toll-taking business model, but there’s at least one solid fact.

Last year, Uber did something right by leaving the money losing Chinese market. As part of its deal to exit China, Uber swapped its China operations for a piece of its competitor, Didi Chuxing. Uber’s eighteen percent of Didi has two benefits. First, if Uber loses to Didi it’s still a win for investors as the value of Uber increases. Secondly, the Didi investment explains a small part of Uber’s $70 billion valuation.



Give and Take at Symantec

So far this year, Symantec gave cash to investors, but also took cash from them, too. On March 10, 2017, Symantec said it would buy $500 million of its shares as part of a Board approved, $1.3 billion stock repurchase program. A month earlier, Symantec announced its desire to sell investors $1.1 billion in senior unsecured notes to finance the purchase of LifeLock.

The $2.3 billion LifeLock purchase comes after the acquisition of Blue Coat for $4.6 billion in August 2016. Both acquisitions were done with a mixture of cash and debt, since Symantec has little domestic cash. At the end of last year, Symantec had cash of $5.6 billion, of which more than half was overseas; Symantec would incurred substantial taxes repatriating the overseas cash.

Since prodded by activist investor, Paul Singer, Symantec has been returning cash to investors through stock repurchases and dividends. This month’s $500 million stock repurchase was really part of Symantec’s promise, made last year, to return $5.5 billion in cash to investors. To grow the company and appease investors, Symantec must give and take.


No More Mobileyes

Rather than why, how Intel purchases Mobileye is more important. On March 13, 2017, Intel announced a $15 billion deal for Mobileye, which rivals last year’s acquisition of Altera. Intel purchased Altera for $16 billion using a mix of short-term and long-term debt; but for Mobileye, Intel is using mostly all cash and little debt.

Most of Intel’s cash is overseas. At the end of last year, Intel had cash of $17 billion of which $14 billion was overseas; that latter amount is subject to taxation if returned backed to the United States. Intel said on the investor call that the Mobileye purchased will be financed with cash, and cash that is overseas.

Intel’s overseas cash will go to the Mobileye investors, who are mostly overseas. In fact, twenty percent of Mobileye is owned by Israelis: Shmuel Harlap (outside investor), Amnon Shashua (c0-founder), and Ziv Aviram (co-founder). Intel can use its domestic cash for investors located in the United States, due to the Mobileye 2013 IPO, without incurring any taxes.

Now after the Altera purchase, Intel will have little overseas cash, at least for a while. Using overseas cash for foreign acquisitions is beneficial since the U.S. company does not incur any repatriation tax. Microsoft used that strategy in the past with its acquisitions of Skype and Nokia.

Now with less overseas cash, Intel is less likely to purchase foreign companies, especial Israeli ones, at least in the short-term.

Verizon Can Say NO to Yahoo

Verizon can still say “NO” to Yahoo. While Yahoo finally agreed to sell its online assets to Verizon, the two parties will still be connected, at least through Yahoo Japan. As Yahoo becomes Altaba, essentially an investment fund, Verizon still has a say in the Yahoo Japan shares that comprise part of the value of Altaba.

Altaba can’t easily sell its Yahoo Japan shares. First, if the Yahoo Japan shares were sold, then there would be high tax bill and Altaba would return less cash to investors.  Secondly, due a joint venture agreement between old Yahoo and Softbank, Altaba can’t freely sell the Yahoo Japan shares without involving Softbank; if Altaba did decide to sell the Yahoo Japan shares, then Softbank would have the right to first buy the shares.

Now a third roadblock, if Altaba wants to sell Yahoo Japan shares, it will need the consent of Verizon.  As stated in stock purchase agreement…

….the Fund may not, without Verizon’s consent, to the extent within Yahoo’s control, and except as may result in a violation by the Fund or any of its directors, officers, or employees of applicable law (including fiduciary duties) sell its shares in Yahoo Japan or consent to an acquisition of Yahoo Japan or all or substantially all of Yahoo Japan’s assets if such action would reasonably be expected to cause the termination of, or give Yahoo Japan the right to terminate, the license agreement between Yahoo Japan and the Company

Airbnb Sleeping with Snap?

Airbnb is checking out of private company status next year. Brian Chesky, co-founder of Airbnb, made his intention, of going public by 2018, today at the Economic Club in New York City.  Airbnb doesn’t need more cash, having been profitable since the second half of last year.  With an asset-light and toll-taking business model, investors should be asking: what type of equity will Airbnb sell?

Brian Chesky said that the…“only reason to go public is to give investors immediate liquidity”. A public offering will essentially open the door on liquidity and give early investors some place for selling their shares. In this respect, Airbnb is similar to Snap: an IPO not so much for cash for the business, but liquidity for venture capitalists, hedge funds, sovereign wealth funds, and others.

When there is an initial public offering, will Airbnb retain control and issue dual-class shares like Facebook or Google? Or will Airbnb follow Snap and issue only non-voting shares, which have caused a raucous among large institutional investors.  Non-voting shares have been characterized as a master limited partnership (MLP), commonly used by public private equity firms.

As the general partner, management retains all the control and makes all the decisions in the master limited partnership. In exchange for having no say in management, the limited partners escape legal liability, but also get to share in the income of the partnership.  It was the MLP that allowed private equities firms – Blackstone, KKR, and Carlyle – to IPO over the past ten years and avoid severe tax consequences.  

Institutional investors view selling stock to the public as an exchange of money for votes. For Airbnb, the trade could just be selling stock so the public gets a piece of the action, but no control. Airbnb investors would need be satisfied only with share appreciation and dividends; this is the trade Snap made earlier this month.


Large Investors Fear Snap

Snap’s stock falls in one full week of trading. Immature founders, Facebook, and limited user base get cited for the slow down, but may be no one likes Snap’s non-voting stock. Snap’s co-founders’ total control doesn’t sit well with large investors who are accustomed to having a say in management.

Snap warned investors of the dangers of non-voting stock in the prospectus. One risk is that the difference between non-voting and voting stock is so great, that the market may have trouble valuing the company. This would cause the non-voting stock to have a “lower trading price or greater fluctuations in the trading price”.

Snap summarized the risks by stating:  

We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business….Nor can we predict whether this structure will result in adverse publicity or other adverse consequences…

When pursuing passive investment strategies, larger investors, who don’t want it, may still be forced to own Snap. That occurs when Snap gets included with other companies in a stock index, such as the S & P 500 or Russell 2000. In passive investing, investors follow the market, instead trying to beat the market; they do so by purchasing the entire stock market that is represented by the stock index.

To avoid accidentally owning Snap, the Council of Institutional Investors (CII) wants index providers to exclude the company. The CII also wants stock exchanges prevented from listing companies with solely non-voting stock; if that’s not possible, the CII wants the SEC to “bar future no-vote share classes”. Those demands were made public this week at the SEC where the commission was discussing Snap’s non-voting stock.

Large investors are very afraid that other companies will copy Snap and issue only non-voting shares. Passive investing is cheaper for larger investors than actively managed strategies, such as hedge funds or private equity. The CII believes that more non-voting stock would lead to “market confusion” and disrupt “simple passive approaches to investment”.




Airbnb Following Uber

China’s sovereign wealth fund, China Investment Corporation (CIC), participated on Airbnb’s most recent funding round. 

It’s a move reminiscent of the Saudi Arabia Public Investment Fund’s $3.5 billion investment in Uber last year. Beyond financial gain for the Kingdom, Saudi Arabia also gets mobility solutions and employment opportunities for its citizens. Uber, on the other side, is able to expand into another part of the world, especially an emerging one.

Airbnb acknowledged China’s growth potential by establishing working relationships with China Broadband Capital and Sequoia China in 2015. Since then, Airbnb set up its China subsidiary and last fall, was reportedly in discussions to purchase Airbnb clone, Xiaozhu. Now with the CIC investment, Airbnb could be getting help from the Chinese government, besides just funding.