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No. of Recommendations: 3 click to download pdf

3 common types of situations:
1. A great business selling at a high valuation (not for us)
2. A mediocre business selling at an absurdly low valuation (perennial temptation)
3. A perfectly good business selling at a low valuation because it is being run (or is perceived to be run) by the corporate equivalent of Beavis and Butthead.
See drawing of Leo Apotheker and Jerry Yang as Beavis and Butthead

We purchased Yahoo in 2009 at $12 a share.
Backing out the after-tax value of the Asian assets left a negative value for the core Yahoo business. Being paid to accept a debt-free business generating $600M of free cash flow.
A compelling risk-reward tradeoff.
Competition for advertising with Google and Facebook remains a risk.
Management turned down $31 offer from Microsoft.
Are managers/Board friends or foes of shareholders?
Carol Bartz did bring adult management but did not monetize Yahoo's enormous web presence.
Daniel Loeb's Third Point Capital is publicly harassing the Board and trying to get on the Board.
Still remain at the mercy of management and the Board.

HP's situation, on the other hand has resolved itself with a management change.
New CEO Meg Whitman simply has to be a patient adult and the stock will be $50 in 2 years.
Excellent balance sheet.
Selling at 6x cash earnings.
Double digit operating margins.
$9B in free cash flow.
Earnings are expected to grow this year and next.
Meg Whitman does not have to be the next Steve Jobs.
Company should buy back 4% of stock each year, raise the dividend consistently and spend the leftover $2B each year to supplement the R&D pipeline. With any luck the company would then trade at a whopping 10x cash earnings that is in line with the rest of the tech sector.

We strongly prefer to invest alongside people whose incentives are properly aligned with our position – which is generally that of the common shareholder – and who have a demonstrated track record of acting rationally on pour behalf. But there are times when the degree of valuation discount – which may stem from investor disgust with present management – is so great that the risk of the possibility of another inane corporate venture or further mediocrity is deemed to be acceptable.
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