Softbank Cashes Out of ARM

Softbank is reportedly monetizing part of its ARM holdings with a partial sale to the Softbank Vision Fund.

The transaction allows Mr. Son to monetize his ARM holdings while still maintaining control. Softbank purchased ARM last year for $32 billion and is now selling one quarter for $8 billion. Softbank will still effectively control more than three quarters of ARM since Softbank is also an investor in the Vision Fund.

Selling part of ARM, while retaining control, is similar to another transaction by Softbank. Softbank monetized its Alibaba shares in 2016 with the same outcome. Using derivatives, Softbank appears to have gotten cash from their Alibaba holdings, while still owing the Alibaba shares.


Alibaba is china

Time to reflect upon this: Softbank is working hard, putting together another investment fund, the Vision Fund, to replicate prior successes like Alibaba.

A small investment in Alibaba, made about fifteen years ago by Masayoshi Son, is now worth many, many billions.  Only Yahoo’s Jerry Yang had the same “luck” when he invested in Alibaba a little over ten years ago. Yang’s investment has grown to overshadow the worth of Yahoo’s other operating businesses.

Alibaba’s public stock offering provided an opportunity to cash out for Yahoo and Softbank. Last year, some of Softbank’s Alibaba shares were sold for $10 billion in order to pay down debt and strengthen the balance sheet. Softbank still owns about one third of Alibaba.

Yahoo doesn’t own a third of Alibaba, but still has a substantial ownership. Like Softbank, Yahoo sold some Alibaba shares; this time, the sale was in 2014 and by Marissa Mayers. Unlocking value in the remaining Alibaba shares, the machination of Starboard Value’s Jeffrey Smith, has lead to selling of Yahoo‘s online business to Verizon.

What would happen if Jeffery Smith and Masayoshi Son were wrong? That Alibaba isn’t worth so much. Then they wouldn’t need to worry so much. For example, Naspers small bet on Tencent is now worth many, many billions, leaving current the CEO with an “existential crisis” of his next bet.

In these euphoric times, Alibaba may not be that high. Famed short-seller, Jim Chanos did have a short position on Alibaba as of last year. His shorting thesis is that Alibaba’s true earnings are obscured by the use off-balance entities. His trade may be wrong, but what is right is understanding the importance of Alibaba’s value to Softbank and to a lesser degree, Yahoo.

It’s not china, but with Alibaba, we must be careful, because it could break.


Yahoo’s Verizon Tax Bill


Last month, Yahoo announced the details of its sale to Verizon in a proxy statement.

Kara Swisher, of Recode fame, said of the proxy:  “It’s a pretty dry document, written by lawyers for lawyers about how shares will be distributed and what goes where”.  Yet for Yahoo investors, the proxy told more: the taxes dues from the sale.  

The  sale was a workaround to separate Alibaba stock in tax efficient manner as stressed by Jeffrey Smith of Starboard Value. The first method attempted was a tax free spin-off of the Alibaba shares to shareholders.

After the IRS blocked that pass, Starboard encouraged the reverse: sell the operating business and leave investors with the Alibaba stock.

As reported, Verizon will pay $4.8 billion in cash to Yahoo for stock in a subsidiary holding the operating business. To Yahoo, the stock is worth $4.1 billion. So the taxable gain from sale was $700 million.

Yahoo will owe $287 million in State and Federal taxes, after slapping estimated tax rate of 41% on the $700 million gain. The remaining cash of $4.5 billion will go to the existing shareholders of Yahoo.


The Day Yahoo Died

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October 23, 2005 is when Yahoo acquired a stake in Alibaba. A year before, Google had gone public and, rather than invest in others, Google was investing in itself. Yahoo co-founder, Jerry Yang engineered the acquisition of 46% of Alibaba, but that deal may have marked the end of Yahoo. For afterwards, one company thrived and the other did not.

Google thrived by outspending Yahoo in terms of capital expenditures. Companies, like people, grow by reinvesting in themselves. You can earned more with an education, so you invest money and time in acquiring one. Companies spend money on capital expenditures which allow them to expand their business, so in the future they can receive increased cash flows from operations.

Google spent three, four, five, and finally six times the amount Yahoo was spending on capital expenditures during 2005 to 2010.  Spending only slowed after the Lehman Shock of 2008 for both companies, but Google still spent twice as much as Yahoo as shown in Chart I. In 2005, Google spent $800 million and five year later was spending $4 billion on capital expenditures.

Source: Annual Reports

It’s difficult knowing where the money was actually going, though.  In its 2005 Annual Report, Yahoo said it purchased “information technology assets to support our expanding offerings, our increased number of users and our international growth.” While in same year, Google disclosed it spent partly for “information technology infrastructure….”

Then a secret, but now more better known, Google was quickly building and leasing lots of data centers. In 2008, Nicholas Carr would explain Google’s technology strategy in the The Big Switch. Google’s then business strategy is even simpler to explain here: build data centers to spend search inquires, attract users, sell ads and then repeat.

Google beat its rivals in search and increased its operating cash flows. In 2005, both Yahoo and Google earned approximately $2 billion from operations. But afterwards, Google’s cash flows increased two, three, four, and five times from the level set in 2005. In 2010, Google cash flows were now $11 billion. By comparison, Yahoo’s cash flows from operations in 2010 were lower, not less than zero, but $1.2 billion as shown in Chart II.

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Source: Annual Reports

Yahoo did not reinvest in its core business in the same way as Google. Yahoo did spend $1 billion and its China properties for a piece of Alibaba. Yahoo’s Alibaba investment has paid off and now represents most of Yahoo’s value. And after Yahoo sell its core business, patents, and other assets, the Alibaba stock will be all that remains for shareholders.

Yahoo could have spent $1 billion in other ways, but did not. Google said back in 2005 that “investments in our business are generally made with a focus on our long-term operations”. Yahoo fell behind long ago, because it didn’t keep up and move ahead. And that all began on October 23, 2005.

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