Yahoo! and Facebook are Dumb

Techcrunch reports on details of the Yahoo! courting of social networking site, Facebook. Management at Yahoo! has been under the gun because it is perceived that the company is being outmaneuvered by it's rival Google. These observers suggest that Yahoo! needs to catch up and start making acquisitions. It appears it is trying.

But management at Yahoo! would flunk Warren Buffett's test on Internet company valuation because they would have flubbed an answer to a fundamental question: How do you value an Internet company? The answer to this question comes later.

Yahoo!'s answer would be unacceptable to Mr. Buffett. A key assumption here is that the Internet is a rapidly changing set of technologies, and does not lend itself to making long term DCF style projections for companies such as Facebook.

It's really impossible to know what Facebook, and the Internet, will look like in 18 months, let alone 5 or 10 years. A DCF calculation on an early stage Internet company is a foolhardy exercise. You can "project" anything you want into these models, and that's exactly what Yahoo! did.

Yahoo! though, makes a projection of Facebook's financials out to 2015, or 9 years! Its not surprising at all that these projections "justify" the absolutely astounding price of $1.6b that Yahoo! seemed willing at one stage, to offer Facebook. What does Yahoo! foresee for Facebook in 2015? Nearly $1b in annual profit! This for a company that has $50m of revenue, and probably zero profit, today.

Evidently the owners of Facebook didn't think the $1.6b offer was enough and spurned it. Thus, Yahoo! may have been saved by a financial insanity greater than it's own. And that, readers, is saying something.

By the way, the correct answer to Buffett's question of how does one value an Internet company is...a blank sheet of paper. He would give an F to anyone who even attempted a valuation.

The number crunching folks at Yahoo! would be barred from Buffett's class until they had read Benjamin Graham's The Intelligent Investor.

Link to Techcrunch

Goldman is only human after all

Whoops. Underperforming common benchmarks by 27% in a year, as a big Goldman Sachs sponsored hedge fund did, isn't good. The S & P 500 is going to be up around 15% with dividends in 2006. But this fund was up 40% in 2005, when the S & P only managed about 5%, as I recall.

What happens, though, is after such strong outperformance, a lot of "new" money flowed into Alpha. That's typically what retail investors do too. They pile into hot funds, only to see them phizzle out, just after they put their hard earned money in. The big boys are no different. In this case, chasing performance at Alpha was a bad idea, given the opportunity costs.

This is a "macro" fund, with lots of leverage no doubt being applied. The managers play a highly evolved guessing game on the direction of various global markets. This year, it has been short U.S. stocks and long the greenback. Both positions have gone against this $12b fund. The recent strong rally in U.S, stocks is being fueled, in part, by funds like these reversing their wrong way bet.

The fund has never ended a year this much in the red. The folks who invest in these things have itchy trigger fingers. With the intense competition for gathering assets, Goldman Sach's Alpha could be quite a bit smaller this time next year.

go to Goldman's Alpha hedge fund off 12% for year

Primedia is Fixing Itself

Primedia is an orphan stock. It trades for about a buck and half on the NYSE under the symbol PRM. It's really quite a bundle to get your arms around. First, its old media. Magazines mostly. It also is the home of Channel One, the ambitious educational TV network that never quite lived up to its hype. This business has been going south.

The big problem here though is debt. There is a ton of it, although it seems manageble. It is a private equity deal that wasn't exactly a home run for KKR, the sponsors, and now dominant shareholder.

A break up of the company is being contemplated. In fact its been talked about for over a year now, since October of 2005. It makes sense to break up Primedia because, like a lot of companies in need of restructuring, there is "good" and there is "bad" in Primedia.

Primedia announced the sale of some consumer magazines. This sale could be the sticking point in getting a spin-off of the consumer unit off the ground. A form 10-12b has been filed by Primedia. Expect an updated one soon that reflects the details of this sale.

The shares look almost fully valued in the $1.60 range, but volatility abounds here. Weakness could present an opportunity, especially if Primedia makes the announcement to break up that a very very few ;-) of us have been waiting for.

Lancaster Colony should do something

Lancaster (lanc) seems ripe for a corporate restructuring. It has three diverse businesses, one of which is highly profitable, the other two, which are smaller, lose money. If all it did was shut down the two money losing operations, the stock would go up. But I think they can better. And it looks like the folks there are considering taking action, with some kind of announcement to come soon.

This is from the latest 10q.

"In April 2006, we announced that we are exploring strategic alternatives, including potential divestitures, among our nonfood operations. This process is ongoing with the assistance of outside financial advisors, but there is no assurance that any specific transaction will result. Given the current status of the project, it is unlikely that we will see significant developments until December of this year or later."

This looks promising to me as Lancaster's best business, specialty Foods, has low teens operating margins. Carving everything off around this nice business would create a lot of value here.

Walter pours out Water

Spin-off action straight ahead. Mueller has received notices from some prominent value investors who like the stock. Its hard to predict what will happen here. Will it be dumped? Walter has a Coal business. Investors who want to own commodities may prefer Walter to Mueller. Is Mueller the prize; or is Walter going to be the prize? We will know starting in about ten days.

Walter Spin-off of Mueller

Medtronic loses Physio-Control

This one looks promising. Medtronic is in a lot of indexes and this spin off will be quite small relative to Medtronic. There should be some forced selling.

The company, to be called Physio-Control Inc., will have an estimated $450 million in annual sales.

Medtronic has had a great record of results over the years. This likely is a decent business that just doesn't fit current strategy. Don't hold your breath for this one, however. The transaction is expected to be completed in the first half of Medtronic's fiscal year 2008.

Link to Medtronic to spin off external defibrillator division - MarketWatch