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Posts Tagged ‘Dr. Eric Jackson’

Eric Jackson of Ironfire Capital has a superb article at Forbes (How a “Cash-Rich Split” Could Take Yahoo! to $41/Share) setting out his “cash-rich split” analysis of Yahoo! Inc. (NASDAQ:YHOO). Here’s Jackson’s analysis:

A “cash-rich split” is the ideal way that Yahoo! should deal with its Asian assets. Furthermore, Yahoo!’s advisers – Goldman Sachs (GS) — must know this. They are smart guys and this is so obvious. If Yahoo!’s board is not yet convinced of this, they should be. Any leveraged recap plan or selling only a small piece of Yahoo! to private equity would be highway robbery of the shareholders by the board compared to a “cash-rich split.”

  • What is a Cash Rich Split? Here is a definition.
    • A cash-rich split-off is an M&A technique whereby the Seller exchanges stock of the Company for stock of a “cash-rich” subsidiary of the Company (“SplitCo”) on a tax-free basis
    • Benefits of cash-rich split-off for Company:
      • Opportunity to tax-efficiently dispose of a non-core asset
      • Opportunity to repurchase shares at attractive price
      • Company should seek to negotiate a share of Seller’s tax savings through a discount in the valuation of the shares repurchased
    • Benefits of cash-rich split-off for Seller:
      • Tax-free disposition of Company’s low tax basis stock by Seller, substantially for cash
      • Seller can negotiate with Company to contribute operating assets which Seller seeks to acquire
      • Alternative use: can also be used to unwind a stock-for-stock monetization structure on a permaently tax-free basis (e.g. Time Warner Cable/Comcast)
  • How would this work for Yahoo? The pre-tax value of Yahoo!’s 40% preferred stake in Alibaba Group is around $14 billion based on related transactions over the past two months (and Yahoo!’s last earnings call). The pre-tax value of Yahoo!’s 35% stake in Yahoo! Japan is $6.5 billion at Yahoo! Japan’s current market price of Y25,000. Let’s discount this to $5.5 billion as Yahoo! Japan might need an incentive to participate and liquidity. Only 66% of the compensation involved in a “cash-rich split” can be in the form of cash. So for their $14 billion of Alibaba Group stock, Yahoo! would receive $9.2 billion in cash and $4.8 billion of “other” assets. The $5.5 billion for Yahoo! Japan shares would be roughly $3.6 billion in cash and $1.9 billion in “other” assets.
  • Where do Alibaba Group and Yahoo! Japan get billions in cash for this transaction? Jack Ma could sell shares of Alibaba Group to Temasek (main contributor) and perhaps other interested parties (such as DST, Silver Lake) also participate. Yahoo! Japan already has around $2.5 billion in cash today. The rest can come from Softbank (who’s also involved in both Alibaba Group & Yahoo! Japan) or a secondary offering.
  • What are the “other” assets that Alibaba Group & Yahoo! Japan can contribute? This looks like a key issue with Alibaba Group’s tangible assets of only a $2 billion and Yahoo! Japan without a non-core asset of significance. The key is that only 5-10% of the total contribution has to be from an asset owned for more than 5 years. The remaining assets (23-28% of total spin value) can be acquired as part of the deal. Hulu might be an interesting asset for $3 billion (or whatever the market price is) and would be a great strategic fit. There are many other content, video, and social acquisitions that could be additive to Yahoo!’s core business.
  • What restrictions would Yahoo! have with the SplitCo proceeds? Yahoo! would have access to the cash the day the transaction closes.
  • What would Yahoo! look like post the 2 “cash-rich splits” of their Asian assets? You’re waiting for $41/share. We’re getting there. This is where it gets very interesting. Post split, Yahoo! would have close to $16B in cash ($3 billion of their existing cash + $9.2 billion from Alibaba Group + $3.6 billion from Yahoo! Japan). Yahoo! would also control almost $7 billion of “other” assets contributed as part of the splits. And Yahoo! would still have their core search and display biz worth $7.5 – 12 billion (based on a 5x – 8x multiple). It’s hard to see this portfolio of assets worth much less than $30 billion vs. the current market cap of $20 billion. That translates to fair value of $25/share.
  • What is the bull case if this plays out as described above? Yahoo! would be advised to use their cash to conduct a massive equity shrink, using a series of tender offers. And, of course, the lower the buyback price, the more shares they could buy back and the higher Yahoo!’s fair value rises. Let’s say Yahoo uses the $16 billion in cash to buy back as many shares as they can for $18/share. The number of the shares outstanding will go from 1.25 billion to 350 million. Yahoo! would still own the $7.5 billion core business + $7 billion of assets (not including any value for the patents which is ludicrous). $14.5 billion/350m shares = $41 stock. And the board — if they were really channeling John Malone — could conceivably lever up and buy back more shares. Simple sensitivity around the average buyback price and leverage is a very interesting exercise for one to play with. You can get to above $45 and $50/share very quickly.
  • What are the risks? 1) I’ve said it before and I stand by it — this is the worst corporate board in America. They could make a dumb decision. Fortunately their advisers understand the “cash-rich split” potential and Dan Loeb is standing at the ready to ensure the board makes no bozo moves. 2) They could name a new CEO first, before explaining the rest of the plan. This gets back to point 1 and a dumb board. 3) There are obviously many parties involved and all have to agree on price, timing, etc.

The YHOO situation is starting to get very interesting with Dan Loeb and Third Point holding a position and agitating for change. With a potential $41/~$15 payoff, it’s worthy of further consideration.

No position.

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In an article on his Breakout Performance blog, Activist Investors Sidelined by Brutal Market, Dr. Eric Jackson gives some advice to the next generation of activist investors. Jackson is the founder of Ironfire Capital, an activist fund manager that uses “Internet-based social networking tools to gather information and amplify the impact of current focus campaigns,” and is perhaps best known for his campaign against Yahoo! Inc (NASDAQ:YHOO). Jackson believes that, to be successful, the next generation of activists must do the following:

  1. Hedge, in order to preserve partner capital in the event of terrible years like 2008. The days of long-only are over.
  2. Build a reputation for always doing right for shareholders (especially long-term holders). Some of the “quick fix” activists of the last five years never won the trust of large mutual funds and pension funds, who tend to be the biggest holders of stock of the large-cap companies. As a result, proxy contests failed to win over the support of this important constituency, for fear of how these activists would represent their interests properly.
  3. Focus more on strategy and operations, less on single events. There will always be a place for activist investors to go after a company, advocating they sell a single division, or do a quick dividend to shareholders. However, these situations tend to be more prevalent in small-cap companies. Large-cap companies, by definition, have more complex problems and require more complex solutions. The next generation of top activists will understand this and have deep expertise in their firms on strategy and operations.
  4. Use the tools of the Internet and social networking. In 2007, when I ran a successful activist campaign against Yahoo!, which resulted in unseating Terry Semel as CEO after a large “no” vote at the annual meeting, I owned 96 shares of Yahoo! However, I was able to get my message out to large and small shareholders via my blog, YouTube, wikis, Facebook and Twitter. More than calling attention to my ideas, these social networking tools allowed fellow shareholders to pledge support to my group and encouraged them to suggest additional ideas for how Yahoo! could improve. I was most surprised and pleased with how many existing Yahoo! employees participated. Yet, their interests were perfectly aligned with our groups: We were all stockholders of Yahoo! and wanted to see the stock price go up through needed changes, which the current board and management were not making. The next generation of large activist investors will be masters at using the Internet to conduct their campaigns.
  5. Be more collaborative, less combative with target companies. It will always be necessary to run successful — sometimes nasty — proxy contests against entrenched boards and management. In my opinion, the Yahoo! board, for example, will never respond to a “nice guy” activist approach. It is so entrenched and disconnected from the opinions of shareholders that it would be impossible to reason with them. There’s a time to knock heads. However, some activists only knock heads. They only know how to hit one key on the piano. The next generation of activist investors will be able to play hard ball but tend to be much more collaborative with the board and the CEO — at least at the beginning, until reasonable dialog leads nowhere. Such an approach is also far less expensive than an “all-negative, all-the-time” approach.

Jackson makes an interesting point. A full blown proxy battle is prohibitively expensive for all but the very biggest stockholders (and even then it is an unappetizing prospect if it will materially reduce returns). If regulatory reform makes nominating directors a simpler and cheaper process – which the SEC’s proposed “proxy access” rules do – then the “tools of Internet and social networking” become potent weapons that act to level the playing field for the smaller investor. Such a change could create a new generation of web-savvy micro activists, who control only a handful of shares but understand how to use social networking media to influence boards, much like Jackson does with Ironfire Capital and his blog. But with a small capital base, how does Jackson make the campaign worth his while? In other words, how does he get paid?

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Barnwell Industries, Inc. (AMEX:BRN) has filed its September 10Q and the results are encouraging. Even though the stock is up more than 40% since our first post, we believe that BRN is still undervalued and so we are maintaining our position.

We started following BRN because its liquidation value of $55M (around $6.52 per share) was some 86% higher than its market capitalization of  $29M based on its November 28, 2008 close of $3.51. Dr. Eric Jackson’s Ironfire Capital LLC had launched a “‘friendly’ activist campaign targeting the company to unlock shareholder value”.

BRN has now filed its September 10Q and we believe that its liquidating value has increased from our original estimate of $6.52 per share to $6.91 per share, which is some 40% higher than its Friday close of $4.95. Set out below is our summary analysis of the balance sheet (each “Carrying” column shows the assets as they are carried in the financial statements, and each “Liquidating” column shows our estimate of the value of the assets in a liquidation):

brn-summary-q3

Conclusion

Although the stock has risen substantially, at 72% of its written down value, BRN is still cheap and we are maintaining our position.

[Disclosure: We do not presently have a holding in BRN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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