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Yahoo Deals and Smart Contracts


Yahoo is expecting final bids for its core internet business on Monday, and things seem to be going pretty well, all things considered:

Though several bidders have acknowledged running into what one called “hairy” issues, nothing has emerged as a deal breaker. People involved in the auction describe it as competitive.

And "Wall Street expects the business to fetch as much as $6 billion." Given the drawn-out process, the earlier efforts to avoid selling the core business, and the conflicting statements after the auction was launched, you might have worried that Yahoo was not enthusiastic about actually getting a sale done, and that the auction might fizzle. But no, everything's fine.

Though there is this:

The biggest surprise: In late June, Yahoo told bidders that they could be on the hook for more than $1 billion in immediate payments to Mozilla, the company that makes the Firefox web browser.

In a 2014 deal, Yahoo promised to pay Mozilla at least $375 million a year to make Yahoo the default search engine on Firefox — about $100 million a year more than Alphabet’s Google unit was then paying for similar prominence, according to Yahoo and Mozilla filings.

The contract has a change-in-control provision -- "personally negotiated" by Marissa Mayer, Yahoo's chief executive officer -- in which Mozilla can "demand all of the remaining payments upfront if Yahoo is sold," if "the change in ownership was hurting the Mozilla brand and degrading the search experience." That will "put pressure on any winning bidder to continue Ms. Mayer’s heavy investments in search, which she has championed despite the long odds of success against Google."

So, look. I am sure that it was a commercially sensible decision to negotiate the deal with Mozilla. And it's plausible that, in 2014, Mozilla was worried enough about the future of Yahoo search that it would demand a heavy change-in-control penalty. ("We agreed to make Yahoo our default search engine for the next five years." "You think Yahoo will actually be a search engine in five years?" "Hmm good point.")

But looking back from the perspective of this auction, doesn't it look like a search poison pill? Marissa Mayer's Yahoo management committed itself to the idea that Yahoo's core internet business -- search and advertising and media -- could be turned around to become rich and giant and compete with the likes of Google. The market now seems to have rejected that idea, and core Yahoo is now more or less being sold for parts. (Verizon "would probably merge Yahoo’s internet business with AOL"; private equity would "curtail costs sharply while working out ways to profit from Yahoo’s still sizable audience"; no one seems to want to operate it as-is.) But core Yahoo arranged its business to make it really hard to back down from Mayer's ambitions: You can buy Yahoo for its parts and stop trying to compete with Google, but if you do that, you'll have to write an extra check for $1 billion (on a $6 billion acquisition). Marissa Mayer is selling Yahoo after her big plans for it didn't work out, but she'll still manage to impose those big plans on the next buyer.


A thing that often happens in financial regulation is that the regulators announce:

  1. That thing you were doing, you can't do it any more.
  2. In like five years.

This creates a window for odd things to happen. When JPMorgan lost a lot of money in the 2012 "London Whale" fiasco, a lot of people went around asking why the Whale's trading didn't violate the Volcker Rule; there were a number of plausible answers about portfolio hedging, but the most important answer was just that the Volcker Rule didn't exist yet. Congress had passed a law calling for rules against proprietary trading by banks, but the regulators hadn't gotten around to writing them yet. Now they have, and so, in what I have always found to be a puzzling addition to the Volcker Rule, banks are not allowed to own stakes in private equity funds or hedge funds. Except they are:

The industry has until July 21, 2017, to sever most ties with private funds after the Fed signed off on the last of three 12-month extensions it was permitted to grant under the Dodd-Frank Act. That means the clock is winding down for Goldman Sachs to shed as much as $7.2 billion of investments and for Morgan Stanley to unload as much as $3.4 billion.

There are two basic ways to deal with this sort of long lead time: Either you get out early, to avoid awkward public criticism and quickly move your business toward its long-term future, or you figure, look, regulators are banning this stuff because it is lucrative, we might as well hang on to it as long as we can. Eventually that gets awkward, though, like when you have to sell at the last minute. "There could be a limited secondary market for these investments and the firm may be unable to sell in orderly transactions," said Goldman in a risk factor. Of course there is a third approach, which is to restructure the stuff so that it is no longer banned. "Many of the real estate funds Goldman Sachs and Morgan Stanley invest in may not be prohibited by Volcker depending on how they’re legally set up," and Goldman at least has been thinking deep thoughts about Volcker structuring for a while. There is no need to be hasty about divesting from things prohibited by Volcker; if you ponder them at your leisure, you may find out that they're not as prohibited as you thought.

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