The Yahoo drama continues this week with the news that having fired yet another CEO and changed up the board, Yahoo is preparing to sell its stake in Chinese Internet company Alibaba for $7 billion. The shares are being sold to Alibaba itself, and the word out there is that Yahoo is going to use the cash this generates to buy shares in Yahoo.
In other words, it’s a great example of the “disgorge the cash” approach to corporate management that J.W. Mason laid out in a great post last fall. It’s obvious from the post that Mason takes a somewhat dim view of the practice, but the Yahoo situation is a pretty strong case for disgorgement. Yahoo wound up with a substantial stake in a valuable enterprise through good fortune, but it really has nothing to do with their overall enterprise. So selling the stake to raise cash makes sense. So now Yahoo has more cash, and must make the choice between either having Yahoo’s managers invest it in something or giving it back to Yahoo’s investors so that they can invest it in something. There’s no particular reason to believe that Yahoo’s management team knows better than the average Yahoo shareholder what to do with this Alibaba money, so it’s both reasonable of shareholders to want their money back and reasonable of Yahoo to give it to them. In the end, if the cash ends up disgorged I’d call that a very sensible end to the process.
On the other hand, over the longer-term the functioning of the economy depends on the existence of more ambitious managers and more confident shareholders than you see in this dynamic. To an extent having any kind of forward-looking long-term investments in firm growth almost requires various people to be irrationally overconfident about their own abilities. If every firm was disgorging the cash all the time only to have everyone plow the money back into broad Vanguard funds, we’d have no economy. The “empire builder” mentality that leads Microsoft to pour huge sums of money into Bing rather than disgorging the cash leads to some waste, but it also leads to things like Kinect and inspired Google to invest in creating what looks to be very impressive and workable computer-piloted car technology.