Yahoo to Spend $3B on Stock Buy-Back -- and Management Is Nuts.
Yahoo (YHOO) plans to spend $3 billion on a three-year stock buy-back. I have one question: Is the management team nuts, or are they and major investors just so greedy that a short-term uptick in share price is worth undermining the company's operations and strategy?
In 2009, Yahoo saw a net drop in cash flow of $1.02 billion. The numbers show the reason: $2.42 billion in lost through investments. That's fine, investments can be a pain in a bad market. If you made enough wrong calls, it gets worse, but it happens sometimes. However, the loss helped put a crimp on the company's cash position.
Yahoo's last reported balance sheet for the quarter that ended in March 2010 shows cash and short-term investments of $3.24 billion. That's the low point since the quarter that ended in March 2009. The high point of $3.9 billion was in September 2009. Yahoo's fiscal year ends in December. Look at the end-of-year balance sheets since 2006 and the most robust position was $3.45 billion in 2008.
Unlike Google (GOOG) or Microsoft (MSFT), Yahoo is not a cash rich company. Given that Yahoo plans to spend $1 billion a year for the next three years, that would be an immediate hit of almost a third of the company's cash. Given the competition, how nuts is this? Yahoo wants to be a big Internet player, but won't have the cash necessary a management team might need for either acquisitions or emergencies. Might it pull in more cash over that time? Sure, it might, but as last year shows, that's not something the company and its investors can bank on.
Why is Yahoo undertaking this foolish step? I can only think that it's to boost the stock value by reducing outstanding shares and reversing value dilution. The fewer the shares, the more the remaining shares are worth, given unchanging perceived value of the corporation. Why? To keep larger stock holders happy at the moment? To keep executive stock options plump? It doesn't matter. You buy back stock when you can prudently afford to. I understand that CEO Carol Bartz thinks that the stock is undervalued and wants to keep investors minds off the crumbling edifice that once led Internet business, but this is foolhardy. Then again, maybe another word for foolhardy is now Yahoo.
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