Alibaba has now filed its F-1 document which is the precursor to an IPO probably later this summer.
Several talking heads on television and journalists in articles have declared that the fact that the Alibaba IPO is happening soon means that the honeymoon period for Yahoo Yahoo CEO Marissa Mayer is over. Now, they say, Marissa and Yahoo's core business will have to stand on their own two feet.
There is a line of thought that Yahoo has merely been a tracking stock for Alibaba over the past 2 years. Now, with the IPO on the horizon, these people say, any investor who previously bought Yahoo stock just to own a piece of Alibaba will now sell that stock in order to free up capital to buy the newly public Alibaba stock directly.
So, let's address this issue with some data. Although every case is different, a prior situation where a big tech company was seen as a tracking stock for another entity in which it held a large stake was EMC EMC back a few years when it owned VMWare VMWare. It started trading as a separate company on August 14, 2007. Prior to that, VMWare was owned entirely by EMC.
If the pundits' thesis is correct, you should have seen selling in EMC shares leading up to the VMWare IPO as institutional investors looked to trade out of EMC stock so they could be at the ready to get their orders in to buy VMWare stock.
Let's go to the videotape.
It turns out that in the 3 months prior to the VMWare IPO, EMC's stock went up – and not just a little. EMC's stock increase 15.6% in those 3 months. During that same period, the Nasdaq composite was down 0.7%.
Perhaps once the VMWare stock started trading the IPO aftermarket, EMC's stock took a dive. Not so. In the three months after the VMWare IPO in 2007, EMC's stock increased another 12.4%. And the Nasdaq again lagged, increasing only 3.2% over the same period. However, VMware did do better than either. Its stock popped 58% in the 3 months after the IPO.
So, EMC's stock certainly didn't see a trading out phenomenon, either in anticipation of the VMware IPO or afterwards.
How about a more recent example: the Facebook IPO from 2012. In early February 2012, Facebook filed its S-1 to hold its IPO – one that was hotly anticipated by the market. According to the view that you have to sell one stock in order to buy another way of thinking, you would expect to see Google's stock price flag in the weeks leading up to the Facebook IPO. However, that didn't happen.
From early February 2012 until about mid-June – which was well after the mid-May Facebook IPO – Google's stock traded in line with the Nasdaq index. It wasn't higher or lower.
Then, starting in mid-June, a month after Facebook had been trading (and trading badly), Google did experience a big upswing in pricing relative to both Facebook and Nasdaq. It appears that people did pass judgment on Facebook's business that it wasn't quite as revolutionary as everyone first thought. They seemed to then gravitate back to Google as the leader in the mobile and desktop ad space. But Google never suffered in anticipation of the Facebook IPO.
The bottom line is that investors will judge Yahoo on its own merits before and after the Alibaba IPO. And, contrary to a lot of commentary, Alibaba's valuation will continue to swing Yahoo's stock price quite a bit post-IPO. That's because Yahoo will continue to own 14% of Alibaba. If Alibaba's stock trades up to $260 billion in market cap as some sell-side analysts have suggested, Yahoo's stake will be worth $22.6 billion net of any future taxes Yahoo might have to pay – that's two-thirds of the current Yahoo valuation of $34 billion.
So you can expect to see Alibaba's valuation swing a big part of Yahoo's stock for the forseeable future even after the big IPO date comes.
[Long YHOO]
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