Greenlight Capital chief David Einhorn, who made his reputation short-selling Lehman Bros. before its collapse, raised eyebrows earlier this year when he took a long position in beleaguered internet portal Yahoo (NSDQ: YHOO). At the time, Einhorn saw value in the company, particularly its 40 percent stake in Alibaba, the Chinese E-Commerce giant. But after news emerged that Alibaba’s CEO Jack Ma spun off its lucrative Alipay division into a company he controlled — reportedly without notifying shareholders — Einhorn dumped his Yahoo position.
“This wasn’t what we signed up for,” he wrote in a note to clients.
The Alipay saga, which led to a series of tense exchanges between Alibaba, Yahoo, and Softbank (another major shareholder), underscores the challenges inherent in investing in Chinese companies. The case caused a great deal of controversy in China, and prompted the publication Century Weekly to write a scathing editorial accusing Ma of “violating contract principles that support the market economy.”
Einhorn said he sold his Yahoo shares for a “modest loss.”
Yahoo’s 40 percent stake in Alibaba has become viewed as one of the search portal’s most valuable assets. In fact, as Alibaba’s share price has risen and Yahoo’s has fallen, the stake comprises an increasingly large share of Yahoo’s overall value. “We would not be surprised if YHOO’s 40 percent stake in Alibaba Group alone was ultimately worth YHOO’s entire current market value,” Einhorn told investors in an April 29 letter cited by The Wall Street Journal.
That was less than two weeks before news emerged that Ma had completed the process of spinning Alipay out of Alibaba last summer — allegedly without notifying investors. Yahoo shares fell 7 percent on the news.
“The partnership bought Yahoo earlier this year based on a sum of the parts analysis which included putting substantial value on its Chinese assets,” Einhorn wrote in the July 7 letter to investors published by Zero Hedge. “Shortly after the purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit ‘hived off’ a valuable subsidiary into a corporation that he personally controls.”
“From there the finger pointing started going in every direction,” Einhorn wrote. “This wasn’t what we signed up for. We exited with a modest loss.”
The Alipay disclosure prompted a “he said, she said” ruckus between Yahoo and Alibaba over who knew what about the move, and when.
Negotiations continue between the two companies over the disposition of Yahoo’s stake in Alibaba. Speaking at the D9 tech conference last month, Ma said: “Peace talks are always difficult.”