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