Yahoo Shows How The Wall Street System Is Broken

Leaving aside whether or not the potential Microsoft takeover of Yahoo is a good idea (strategically), I’m surprised the whole idea hasn’t caused more analysis on how Wall Street works (or doesn’t). The fact is, Microsoft’s first offer back in January was a 62% premium on the market valuation of Yahoo. It only went up from there, but Yahoo never took the offer.

Juxtapose that fact with another fact that according to Wall Street / business schools / the financial system, corporations are expected to maximize shareholder value, and we have a problem with the current example. Even if Yahoo is able to create enough value at some point in the future to meet the value offered by Microsoft in January, it would not be enough. This is because of the “time value of money” concept that Wall Street loves. Without diving into detailed examples, let’s just say that one dollar today is worth more than one dollar at some point in the future.

So this means that the longer it takes Yahoo is come up with the $20 billion it effectively owes its shareholders (the amout shareholders would have gained if Yahoo took the Microsoft offer), the more that $20 billion expectation will grow. It is not a static number.

But that’s not to say Yahoo making up that $20+ billion is impossible, though I personally think it’s improbable. Think of an example were you would not take a $20 billion premium for a sale of something you own a piece of. Does Yahoo come to mind? Not for me, nor does anything else, for that matter. But that may be because I’m not a billionaire. Let me explain.

My current theory is that billionaires running companies have their own agendas. And these agendas generally are in sync with maximizing shareholder value. If they weren’t, then shareholders would get pretty upset. But even if the billionaire CEOs are shareholders themselves, if they’re still likely to be billionaires when following an agenda outside of maximizing shareholder value… (oh, say, an agenda of retaining or gaining power) where’s the disincentive not to follow their own agendas?

I’m not sure, but I’m pegging the “I don’t care as much about more money when compared to more power” at around a billion dollars. I mean, generally speaking, what is there in life that you can do (and want to do) with two billion dollars but not one?

All this leads me to believe that, simply put, Jerry Yang cares more about power than money. In one sense, there’s nothing wrong with that. But I think there’s nothing wrong with that only if we all admit that’s what’s going on. But therein lies the catch-22. Admitting that would be admitting that he isn’t maximizing shareholder value, which would be another route to him potentially losing his power.

But as it stands, if billionaire CEOs can evaporate $20 billion of shareholder value while claiming that they are, in fact, maximizing shareholder value… I feel like they can basically say or do whatever they want and claim that it’s “maximizing shareholder value.” In other words, if not maximizing shareholder value is another way of maximizing shareholder value, then what isn’t? (Do you follow?)

And that seems like a broken system to me.

I don’t know what the solution is, but I think different, non-monetary incentives or consequences need to be in place for people who effectively have enough money that more is inconsequential (my one billion threshold). If the money involved is unlikely to affect their (billionaire CEOs) way of life as they make decisions that could affect the way of life of non-billionaire shareholders… that seems like a big problem (to me).