Breaking News: Yahoo! CEO, Marissa Mayer projected to resign.....

I notice an interesting phenomenon occasionally whenever I get a chance to play golf in Florida. I'm so focused on hitting my next shot that I fail to notice the big, old alligator in the weeds next to my ball. Fortunately, I'm usually playing with folks that know where the alligators like to hang out and they are kind enough to call the beast to my attention, lest they be obliged to refer to me as "lefty" or "peg-leg" on future outings.

Last month, Jeff Smith at Starboard Value LP wrote a wonderfully worded, laser-focused, well thought out, "time is of the essence" letter to Marissa Mayer noting all of the various options Yahoo! has at it's disposal to unlock shareholder value. (Letter Here)

No need to get into the details of Jeff's letter here, you can read it at your leisure. Of course, Jeff's strategies would be absolutely correct, and perfectly logical if this were a normal "unlocking of shareholder value" situation. Unfortunately, as you might guess where I'm going, Jeff is missing a big old Alibaba-gator sitting in the weeds. Here's a paste from my 11/20/2014 post on Laura Logan's CBS News page (and this blog).

When this scheme is discovered, the results will be devastating. BABA stock will be worthless. Yahoo will be out of business. The current Market Cap of Chinese ADR's including BABA is just north of $1.5T (US& Dual Lists included). They will all get an indiscrimanent, overnight 50% haircut, causing a liquidity crisis the likes of which we've never seen.

Let's say, hypothetically of course, that more than a year ago, my assessment was absolutely, spot-on correct.

A few months ago, I further described the consequences to shareholders of Yahoo!, Softbank (and now Rekesh Aurora) as well the long list of financiers supporting these businesses in my "Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness" post.

Since everyone seems to be sending letters around and leaking them to the press, here's the letter I've drafted to Jeff Smith Re: the disposition of Yahoo!'s Alibaba shares and, of course, "leaked" on this blog.

Here's the problem:

It can be presumed, as "insiders" that Ms. Mayer, et al have a full grasp of what's going on at Alibaba. She is in the "either known or should have known" trap.  She probably asked more than a few questions re: Jackie Reses abrupt resignation distancing herself from "anything to do with the greatest IPO in history". I know I would have.

It's an odd, unprecedented situation. Ms. Mayer can't stop or control what Alibaba is doing, yet, she will be held accountable for how she handles the repercussions.  She might turn out to be the greatest CEO in history if she figures this out.....she's in uncharted waters. i.e.) How do I legally transfer this Alibaba mess to someone else, for the benefit of Yahoo! shareholders (or at least minimize the damage to same) without running afoul of the insider trading rules. (17 CFR 240.10b5-1) . Unfortunately, no matter what Yahoo!'s Board and Management believe, in the end, neither the initial Alibaba spin-off or the newly proposed Reverse Spin-off as currently proposed will be exempt from 10b5, nor considered non-taxable under IRC 355 i.e.) The Spin-off or Reverse-Spin-off can't possibly satisfy the active business purpose requirement due to the disproportionate value of the Alibaba shares.  Perhaps this is why they are indicating that the divestiture will take more than a year?  They are hoping that the rest of the market figures out what's going on and the valuation problem will take care of itself?  As always, hope is not a plan.

When Alibaba crashes and burns Ms. Mayer and Yahoo! management will most likely face legal action by whoever is left holding the bag of Alibaba-gators once the spin-off takes place, or if Alibaba implodes before the spin off, she/mgmt/board will likely be sued by Yahoo! shareholders for not acting fast enough to dump the stock. Inevitably, she will either look like she had no idea what was going on (incompetent) or complicit (a crook). Neither epithet leaves a palatable legacy. In any case, it's more likely than not that someone will eventually be presented with a large tax bill from the IRS at some point. The real twist would be that the taxes would attach at the time of the IRC 355 exchange. Theoretically, if Alibaba crashes after the spin-off, the tax bill would be maximized and the underlying asset generating the tax (Alibaba stock) would be worth significantly less, ironically leaving little/no assets with which to pay the tax? I suppose Marissa could just try to make the Ken Lay/Andy Fastow "Hey, I didn't know anything, I just ran the place" argument, but that strategy never ends very well.

The way I see it, Marissa, Yahoo! management and the board have only two options:

1.) Disclose everything they know about Alibaba's financial condition and begin selling/spinning-off or otherwise divesting the Alibaba stock immediately thereafter. That would be one hell of a press conference.; or:

2.) Resign immediately and set up a plan, in conformance with the 10b5 rules to divest their personal Yahoo! shares over the shortest period of time allowed by law and hope that this mess hangs together long enough to get out with at least some amount of cash and a bit of dignity.  Based on her current situation, she could probably negotiate $30 to $50 million in total "out-the-door-walk-away" compensation.   Of course, Marissa will have to bone up on her "Wowww....what luck, we got out in the nick of time!" Blankfein-like speech she's going to have to give at the "what did you know and when did you know it?" Congressional hearings.   But she'll be fine.  Nobody ever goes to jail for this stuff.

Bold Prediction:

So there you have it. I'm projecting that Marissa Mayer, and any other executives or board members with first hand knowledge of this mess will resign relatively soon. It's the only logical choice for them to make.

Don't get me wrong, I've never met her, but I'm sure that Ms. Mayer is a wonderful person. She's just in a horrible, impossible situation. As if Mother Theresa's frock were caught on railroad tracks.....there's nobody rooting for the train.

Finally, please note, I'm not an insider. I'm not talking to any insiders. I'm not breaching anyone's trust. I've come to these conclusions because I've seen this movie before and apparently, I'm one of the few analysts truly enamored with the SEC filings. Again, it's all in the filings. All you have to do is connect the dots.




Additional References:

Jeff Smth's Letter to the Yahoo! Board
http://starboardvalue.com/publications/Starboard_Value_LP_Letter_to_YHOO_08.10.15.pdf

Nikesh Arora - $483 million personal bet on Softbank....with borrowed money.
http://www.japantimes.co.jp/news/2015/11/29/business/corporate-business/no-sweat-risk-taker-arora-lets-%C2%A560-billion-ride-softbanks-future/#.Vmi3v3arS00

Jackie Reses Resignation letter to Alibaba Board - September 16th, 2014.
http://www.sec.gov/Archives/edgar/data/1577552/000000000014048770/filename1.pdf

Yahoo! Filings & 12/9/15 Press Release
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001011006&owner=exclude&count=40&hidefilings=0 

LA Times - Estimates of Marissa Mayer's "walk away" money
http://touch.latimes.com/#section/-1/article/p2p-85294590/

Marissa Mayer Compensation History
http://people.equilar.com/bio/marissa-mayer-yahoo--inc./salary/668659#.Vm2Pemt5mSM

Marissa Mayer - CNBC - Change of Control payout discussion.
http://video.cnbc.com/gallery/?video=3000464853

Maynard Webb and Marissa Mayer CNBC Press Conference - 12/10/15
http://video.cnbc.com/gallery/?video=3000464428

Spring Owl's "99 slide" turn around plan
http://www.wsj.com/public/resources/documents/yahoopresentation.pdf