I got ahold of parts of the fourth-quarter 2011 investor letter that the New York-based Third Point hedge fund — which is prepping a proxy fight with Yahoo — is sending out tomorrow.

(The Wall Street Journal did a short post after it had reviewed excerpts of the letter, but had no text, so here is the real thing about Yahoo in its entirety, folks!)

The letter includes a long section about how Third Point’s main man Dan Loeb feels about Yahoo, and especially in the value of its investment in China’s Alibaba Group. The stakes that the Silicon Valley Internet giant hold in Asia — including in Yahoo Japan — make up for a great deal of its valuation now, as many know and as the activist shareholder points out in detail.

Here’s the Yahoo-Alibaba part, titled “The Case for Alibaba,” in what is a very sharp analysis — except for the part about dinging the press (not nice, Danno!):

Long Equity: Yahoo! — The Case for Alibaba

As investors are aware, we established a sizeable position in Yahoo following a difficult operational and strategic stretch during the waning days of CEO Carol Bartz’s tenure that culminated in a significant sell-off in the shares in August. Initially, we were attracted to the company simply by its significant discount to intrinsic value. In September, we announced publicly that we had accumulated 5.2% of the shares of the company and laid out our case for why valuation was depressed. While the travails of “core Yahoo” grab all the headlines, core Yahoo forms only a modest portion of the Company’s actual value (a mere $2.00 per share, trading at ~14.49 as of 03/12/12). The after-tax value of Yahoo’s Asian assets — Alibaba and Yahoo! Japan — currently constitutes $11 per share of its value (73%), with an additional $2 per share of net cash.

Central to our investment thesis is the hidden jewel in the Asian asset portfolio, and indeed in Yahoo itself: Yahoo’s 40% stake in Alibaba Group, the dominant e-commerce platform in China. According to iResearch, Alibaba currently has 49% of the B2B e-commerce market (four times greater than its nearest competitor), 90% of the C2C e-commerce market (analogous to Ebay), and 53% of the B2C e-commerce market (analogous to Amazon) in 2011. It has complemented these core commerce positions with the leading online payment platform, Alipay, with 49% market share, and also holds the #2 share of the Chinese online ad market (17%, behind Baidu at 28%). Particularly exciting is Alibaba’s share of China’s rapidly growing B2C market represented by Taobao Mall, or Tmall (recently renamed Tian Mao).

According to iResearch, China had 187 million online shoppers in 2011, compared to 170 million in the U.S. As Boston Consulting Group noted in its November 2011 report, “The World’s Next E-Commerce Superpower,” e-commerce transaction value in China is likely to overtake the U.S. by 2015, helped by conditions that mirror the U.S. and in some ways favor e-commerce in China. A combination of broad product assortments and lower prices mirror the U.S., while e-commerce in China benefits from the fixed price certainty missing in China’s traditional retail culture (where haggling is common), from relatively lower shipping costs than in the U.S., and from the limited geographic reach of brick-and-mortar chains.

The Boston Consulting Group report highlights “The Taobao Phenomenon” and notes more products were purchased on Taobao in 2010 than at China’s top-five brick and mortar retailers combined.

The scale and velocity of China’s e-commerce opportunity, when combined with Alibaba’s dominant position, make for a very compelling story. As it moves toward an IPO, Alibaba should quickly take its place amongst China’s online leaders — Tencent ($47 billion market cap), and Baidu ($48 billion market cap). A November 2011 report on Softbank by UBS’s Makio Inui, the product of extensive research into Alibaba Group and a detailed valuation, placed a $63 billion value on Alibaba Group, which would imply just over $13 per Yahoo share after tax. It appears that while 2012 will be the year of Facebook, 2013 could very well be the year of Alibaba as it moves toward a listing.

At the reported $35 billion valuation ascribed to the October 2011 purchase of employee shares by Silver Lake, Temasek and Yunfeng (an affiliate of CEO Jack Ma), Yahoo’s stake was worth ~$7.60 per share after tax. That implies Yahoo’s stake has grown at a compounded rate of 55% per annum since its investment in October 2005, and it is significant that the majority of Yahoo’s value is now driven by its Alibaba stake.

Clearly, as evidenced above, we see tremendous upside in just the Alibaba piece of the Yahoo puzzle.
While the media has covered the drama surrounding the negotiations with Mr. Ma in some detail, Wall Street has continued to neglect the underlying Alibaba valuation story and the press makes too little of it. Certainly there is some compelling reason why Mr. Ma is so interested in repurchasing Yahoo’s stake! We share his excitement and enthusiasm for the Alibaba opportunity, and we respect and appreciate the dominant and dynamic franchise he has built amongst the world’s largest base of Internet users.

Over the last six months we have witnessed the Board of Directors’ “strategic review” that has to date resulted in the hiring of a new CEO, Scott Thompson, the resignation of Jerry Yang, and the pending exit of Board Chairman Roy Bostock and three other Directors. In mid-February we announced that we intend to run our own slate of Directors for the Yahoo board during this proxy season. We stated our intention to nominate well-known leaders in the media space Jeff Zucker and Michael Wolf, restructuring guru Harry Wilson, and Dan himself to the Board. We are glad Yahoo has played a critical role in Alibaba’s early development and hope new leadership at Yahoo can chart a new course for the company’s relationship with Mr. Ma and Alibaba.

The allegation is part of a critical portrait in the book of Mr. Gates, with whom Mr. Allen formed a friendship in grade school that evolved into one of the iconic partnerships of American business. The book, “Idea Man: A Memoir by the Co-founder of Microsoft,” is scheduled to go on sale on April 17. A draft of the memoir was viewed by The Wall Street Journal. An excerpt of the book appeared on Vanity Fair’s website early Wednesday.

The book gives a revisionist take on some details of Microsoft’s history and the relationship between Mr. Gates and his former partner, the two of whom have long been viewed as cordial if not close friends.

Read the rest of this post on the original site »

Again, be wary of reading too much into any stock’s performance on any given day. But it seems safe to draw at least one conclusion: Investors aren’t freaked out about Demand’s symbiosis with/dependence on Google. Even after a puzzling blog post from the search giant last week.

The post, written by Google engineer Matt Cutts, defended the search engine’s performance against a chorus of criticism. But it acknowledged that Google was paying attention to complaints about “content farms and sites that consist primarily of spammy or low-quality content” clogging its search results.

Lots of people logically assumed that Google/Cutts was talking about Demand, although the post never mentioned the company by name. And if Google, which supplies 28 percent of Demand’s revenue and a big slug of its traffic, has a problem with Demand…

But Demand CEO Richard Rosenblatt insists that Cutts wasn’t talking about his company at all. In fact, he says, Demand and Google are getting along just great, in a relationship that pays out real dividends for both parties. It looks like investors believe him.

I chatted with Rosenblatt about the Google post, and the companies’ relationship, yesterday at Demand’s New York outpost. Here’s an excerpt from our conversation:

Peter Kafka: Do you think that Google post was directed at you in any way?

Richard Rosenblatt: It’s not directed at us in any way.

Did you talk to them about that?

I can’t comment on that.

Okay. But they wrote this post, which talks about content farms, and even though you say they weren’t talking about you, it left a lot of people scratching their heads.

Let’s just say that we know what they’re trying to do. Last year, they put out three major changes. They put out Mayday–that was going specifically after spammers and low-quality content. Our traffic increased when they did that. The reason why is our content is being scraped and stolen, [because we're] the largest content producer. So they’re looking for original, non-duplicated, human-made content. That’s all our content. So if they were targeting us, you’d also see Wikipedia, About.com, Wikihow, every person that makes more than a few dozen articles….Our traffic went up.

Second one: They did something called Caffeine, to increase the [search] index. Our traffic went up.

They then did Google Instant. Our traffic went up.

So the three things [Cutts] talks about in his blog post did not adversely affect us. You can draw your own conclusions.

The post talks about going after spammers and content farms. But when you guys think of content farms, you don’t think that means Demand, right? You’re thinking of people who take my copy or your copy, and cut and paste it, and tweak it enough to fool Google.

He’s talking about duplicate, non-original content. Every single piece of ours is original. Written by somebody. And I understand how that could confuse some people, because of that stupid “content farm” label, which we got tagged with. I don’t know who ever invented it, and who tagged us with it, but that’s not us…We keep getting tagged with “content farm”. [Ahem.] It’s just insulting to our writers. We don’t want our writers to feel like they’re part of a “content farm.”

So can you sum up your relationship with Google today?

This is why our partnership with Google makes sense. 1) We help them fill the gaps in their index, where they don’t have quality content. 2) We’re the largest supplier of all video to YouTube, over two billion views and 3) we’re a large AdSense partner. So our relationship is synergistic, and it’s a great partnership. And it’s a partnership that we’re excited to continue to expand.

However, most people aren’t likely to carry a Kindle everywhere — it’s too large to fit in a pocket and hogs space in a handbag. Yet they do tote their cellphones everywhere. So, for years, a dedicated minority of folks have been reading books on smart phones and other pocket devices with relatively large screens.