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.

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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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Alphabet Bets Really Big on Startups in 2016

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Alphabet invested an estimated $100 million in new ventures during the first quarter of 2016. That and other information about Alphabet’s corporate venture capital activities were disclosed in its recently filed Form 10-Q.

Blackout. Google Capital and GV funnel Alphabet’s cash into new ventures. The two units are part of Alphabet’s other bets. After the reorg last year, Alphabet has provided investors with more disclosure about the non-Google activities. But mostly, the other bets are lumped together as one line number on the financial, so the transparency is well, not so clear.

From the 10-Q, filed near the end of April, we know that Alphabet invested an average of $5 million on startups during the quarter. Based upon information from Crunchbase, Google Capital invested in three companies – Pindrop, Girnar, and Cardekho. GV was busier by investing in 16 companies (see table below).

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Red. Read more closely, the 10-Q tells even more about GV and Google Capital.  Total investments in private companies went from $2.6 billion to $2.7 billion, or an increase of $100 million for the quarter ended March 31, 2016. Alphabet is accounting for these investments under the cost method, which means it generally owns less than 20% of the company and/or does not exert any significant control.

Alphabet also values GV and Google Capital investments at $7.8 billion for the recent quarter. That value increased by $300 million from the beginning of 2016 when the fair market value was $7.5 billion. Alphabet estimates the fair market value using private market transactions, since public market transactions are not available.

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More Green. After some adjustments, Google Capital and GV holdings’ appreciated 3% during the quarter. Here is how. The fair value increased $300 million during the quarter, from $7.5 to $7.8 billion. The fair market value can increase due to additional investments and by appreciation.

So from the $300 million, we must subtract the known additional investments of $100 million. Thus we arrived at the assumed appreciation of $200 million or 3%.

But the $100 million is an really important amount, especially at this time. In the past five years, non-venture capital money has followed into Silicon Valley from hedge funds, sovereign wealth funds, family offices, and mutual funds. It seems these players are now pulling back.

So it may be good know that, money is still following into the sector.

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The Garage Sales of Silicon Valley

Alphabet joins this month’s garage sales in Silicon Valley. In late March 2016, Bloomberg broke the news that Boston Dynamics was up for sale. The sale comes after Google purchased the robotics company in 2013. Alphabet’s fire sale is matched by Yahoo’s perennial sale of its core business.

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It not faulty technology causing the “for sale” sign at the Googleplex. The reason is finance, New York City style. No one knows when Wall Street invaded Silicon Valley; but for Alphabet, it happened last year with the hiring of new CFO, Ruth Porat. Ms. Port came from Morgan Stanley to provide financial discipline to the newly created Alphabet.

Google became Alphabet to resemble Warren Buffet’s holding company, Berkshire Hathaway. As Berkshire’s head, Buffet’s main job is allocating capital among the many businesses owned by Berkshire. In the same way, Ruth Porat’s job is allocating Google search cash among Alphabet’s other bets.

So Boston Dynamics‘ sale shouldn’t be a surprise. Alphabet’s first 10-K announced the changes in January 2016: now Alphabet’s businesses would be managed according to “resource allocation” and “performance assessment”. Boston Dynamics did mostly research and was far, far away from selling a robot.

So with a dim commercial future, Alphabet must have decided to allocate its capital elsewhere and sell Boston Dynamics.