The latest noteworthy development in the Yahoo saga has to do with the proceeds from selling their Alibaba stake. The expectation is that the deal will generate about $4 billion in cash for Yahoo. Marissa Mayer’s predecessors had indicated that the money would be returned to shareholders. Mayer has decided that the company should keep the money instead. This makes imminently more sense. Yahoo needs to remake itself, and that effort will require money. Giving the money back to the shareholders, while making them happy now, doesn’t help Yahoo.
Sure, it means “bad news” and puts pressure on the stock price, pushing it down. Guess what? The stock price could go to zero. If the company is still seeing revenue and profit, then the company is still operating. People seem to think that a company’s stock price indicates whether it can continue to operate or not. It doesn’t. The stock price is an estimate of the current value of the company, based on some predicted future value. What the “future” is depends on the investor. Some look at the price now relative to the future in 5 minutes (I can buy it for $15 and sell it for $15.05 in 5 minutes) or in 5 years (I can get it now for $15 and sell it in a few years at $45). A company doesn’t cease operation when the stock price goes to zero. The stock price goes to zero when the company ceases to operate. It is an important distinction.
Is making the shareholders happy important? Certainly, happy shareholders are a good thing. But taking a short-term view at the expense of long-term viability is a huge mistake. Paying the cash out would certainly make the shareholders happy now, but a year from now, when that cash will be useful (and perhaps necessary), shareholders will be unhappy again. Too many companies focus on the short-term. They obsess with the current quarter, sometimes at the expense of the long-term health of the company. By keeping the cash, Yahoo’s stock will certainly suffer. It won’t make the short-term traders happy at all. But it makes more sense for the company for the long term. It gives Yahoo a chance to not just be in existence in the next year or more, but means they might also be thriving and growing.
Of course, if the company tanks, the “experts” will point to the decision to keep the money as a mistake. Few will try to defend the decision to keep the cash, despite the fact that no one can accurately predict the future. But for Yahoo to have a future today, one thing they need is money. Giving money back to the shareholders at this stage is a mistake. There is little to be done to improve the stock price in the short term, without impairing the company and its ability to remake itself.
Keeping the money is a very smart idea. You need money to make things happen, and Yahoo has to make things happen.