In a couple of weeks, we will probably be a witness to the biggest tech initial public offering of all time: the Alibaba (BABA) debut. One of the questions surrounding the IPO concerns Yahoo! (YHOO): What will it do with all the cash it is supposed to receive from its sale of Alibaba stock, a component of the deal?
Most are expecting that, after the IPO, Yahoo will have about $9 billion in cash on its balance sheet after taxes. Many Yahoo investors are worried the company will waste the money on dumb mergers and acquisitions. So far, CEO Marissa Mayer has spent $2 billion on Tumblr and other assorted buyouts, and investors have essentially treated the moves as if Yahoo has dumped all that cash down the drain.
Yahoo came out on the last earnings call in July and claimed that it would spend "at least half" of its IPO proceeds on buying back Yahoo stock. The company hoped it would calm investors' nerves. It didn't. Instead, investors treated the news as a sign that the company would be spending at least half of its proceeds on dumb M&A. Yahoo has been saying that it won't do so. The implied message is that the company has learned their lesson.
But has it?
According to a June 25 filing with the Securities and Exchange Commission, there was another company trying to buy OpenTable (OPEN) before the latter agreed to terms with Priceline (PCLN) -- to be taken out at $103 per share, or almost $2.5 billion. This mysterious "Party 4" was willing to do $95 per share, or $2.25 billion. It just got outbid.
Here are the details of Party 4's interest:
- April 30: Senior executives from Party 4 called representatives of a financial advisor, Qatalyst, to explore next steps with regards to acquiring OpenTable. (Qatalyst incidentally advised Tumblr on selling to Yahoo in the transaction in which Yahoo outbid its initial $800 million offer to trump itself with a $1.1 billion cash offer.)
- May 7: Party 4's management met with OpenTable management On May 9. Unbeknownst to Party 4, Priceline submitted an offer to buy OpenTable for $95 to $105 per share.
- May 20: An executive from Party 4 told OpenTable the company was still interested in talking about a deal.
- May 23: Party 4 submitted a bid for OpenTable of $80 to $85 per share, but wanted an exclusivity period of 30 days.
- May 27: Qatalyst told Party 4 it needed to up their offer.
- June 2: Priceline submitted its final offer to buy the company for $103 per share.
- June 3: Party 4 said it was willing to pay $85 per share, but needed a period of exclusivity of 21 days.
- June 4: Qatalyst told Party 4 its offer wasn't compelling.
- June 5: Party 4 offered $92 per share for OpenTable, but wanted a period of exclusivity of seven days.
- June 8: Party 4 indicated to Qatalyst that it might be willing to raise their offer to $95 per share.
We don't know if Yahoo was Party 4, but it hasn't denied this either. Furthermore, Party 4 was quite slow in responding with requests for periods of exclusivity -- something that Yahoo asked for and received during the Tumblr discussions -- and that sounds like Yahoo to me.
The bottom line is that, to me -- someone who follows this company closely -- I think Yahoo did try to spend $2.2 billion on OpenTable out of their current cash hoard of about $4.3 billion. That's even though the company has told investors it always likes to keep $3.5 billion in cash on hand to run the business.
To me, this represents the latest sign that Yahoo doesn't know what it wants to be. It continues to throw stuff at the wall, and money in the pockets of Frank Quattrone's clients. I don't think OpenTable is a bad company, but I have no faith in Marissa Mayer's ability to assess good M&A targets and manage them afterward.
I am worried about how she'll spend the Alibaba money post-IPO. She should sell the company to either Alibaba or SoftBank before that happens.