Want to know what a real bub­ble looks like? Take a look at Ya­hoo.

The Washington Post Sunday - - BUSINESS - Al­lan.sloan@wash­post.com

There’s a lot of loose talk these days about U.S. stock prices be­ing so high that we’re look­ing at a mar­ket bub­ble.

Sure, the stock mar­ket isn’t cheap by any ra­tio­nal stan­dard. But if you want to see what an ac­tual bub­ble is — and the dam­age it leaves when it pops — take a look at the lat­est it­er­a­tion of the long-run­ning deal in which Ver­i­zon is buy­ing the op­er­at­ing busi­nesses of Ya­hoo, for­merly a pi­o­neer­ing In­ter­net com­pany.

The com­pa­nies an­nounced a price cut Tues­day; Ver­i­zon will pay about $4.48 bil­lion for the busi­nesses, down from the ap­prox­i­mately $4.8 bil­lion an­nounced in July. The cut is to com­pen­sate Ver­i­zon for dam­age that data breaches have done to the value of Ya­hoo’s busi­nesses.

But what I found strik­ing is not the price cut, which had been ex­pected, but the re­la­tion­ship be­tween the value that the deal places on Ya­hoo’s op­er­at­ing busi­nesses and the im­mense value the stock mar­ket once placed on those busi­nesses.

Would you be­lieve . . . north of $90 bil­lion? Well, you should be­lieve it. Be­cause it’s true.

On Dec. 7, 1999, Ya­hoo’s first day as a mem­ber of the Stan­dard & Poor’s 500-stock in­dex, its shares were val­ued at $91.6 bil­lion. The stock closed at $348, up 24 per­cent for the day, and later that year climbed to $432.50. That’s the equiv­a­lent of $87 and $108.13 for to­day’s shares, ad­justed for stock splits.

By con­trast, the price Ver­i­zon is pay­ing for Ya­hoo’s op­er­at­ing busi­nesses — the only kind of busi­nesses Ya­hoo had when it de­buted on the S&P — is less than $5 a cur­rent Ya­hoo share.

(Ya­hoo was trad­ing around $45 when last I looked. But al­most all of that is at­trib­ut­able to its stakes in Alibaba and Ya­hoo Ja­pan, which it didn’t have in 1999. Those hold­ings will re­main with the com­pany, which will re­name it­self Altaba af­ter the Ver­i­zon deal closes, ex­pected to hap­pen by June 30.)

The dif­fer­ence be­tween $108 in 1999 and less than $5 to­day — now that’s what a burst bub­ble looks like.

“Ya­hoo was an ex­am­ple of op­ti­mism run amok to the nth de­gree,” says Howard Sil­verblatt, se­nior in­dex an­a­lyst at S&P Dow Jones In­dices. The stock rose 64 per­cent in the week be­tween the S&P’s an­nounce­ment that it was adding Ya­hoo to the 500 and its first day as an in­dex com­po­nent.

One rea­son the stock rose so quickly af­ter its ad­di­tion to the in­dex was an­nounced, Sil­verblatt says, is that it was owned pri­mar­ily by re­tail cus­tomers rather than in­sti­tu­tions. This meant in­dex­ers had to pay what­ever it took to pry the shares away from Mom and Pop.

And in case you’re in­ter­ested: The S&P 500 is about 65 per­cent higher now than it was the day of Ya­hoo’s de­but. That’s de­spite two huge post-1999 mar­ket de­clines: the 49 per­cent drop from the 2000 In­ter­net-tele­com bub­ble peak to the 2002 trough, and the 57 per­cent drop stem­ming from the 2007-09 fi­nan­cial cri­sis.

To be sure, a good part of the huge de­cline in the value of Ya­hoo’s busi­nesses — which in­cludes numer­ous busi­nesses bought af­ter 1999 — is that the com­pany wasn’t man­aged well and turn­around ef­forts failed.

But the big­gest sin­gle factor in the size of the de­cline is the ab­surd value the mar­ket once placed on Ya­hoo’s busi­nesses. Ya­hoo at $100 bil­lion-plus? A clas­sic bub­ble. The Dow at 20,700 and the S&P at 2,360? High­priced, pos­si­bly over­priced. But not re­motely com­pa­ra­ble to the bub­ble that the Ver­i­zon-Ya­hoo deal is ex­pos­ing in such lurid fi­nan­cial de­tail. And that’s the bot­tom line. For pre­vi­ous col­umns, visit wash­ing­ton­post.com/busi­ness


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