The two most valuable businesses in the world are technology companies. A tech-heavy index is close to its all-time highs. A struggling technology company has put itself up for sale and might be on the verge of selling its assets for more than they're worth.
We've seen this movie before, in 2000 ... and we might see it again. It could signal that the latest tech boom is coming to an end.
The Nasdaq and China's Shenzhen index both have huge weightings in technology shares. Since market lows in 2008-2009, they have both outperformed the rest of the world. As shown below, the Nasdaq has gained 238% and the Shenzhen 310% over that time. The S&P 500 has done well too but is "only" up 207% since the global financial crisis.
And some of the core assets of Yahoo! (YHOO) , once a Web portal giant, are up for sale.
Yahoo! is a shadow of what it once was. At the height of the last tech boom, in early 2000, Yahoo! was worth $94 billion. It is now worth about $35 billion, and $30 billion of that is from its stake in Alibaba (BABA) - Get Report , the Chinese e-commerce company. Yahoo!'s search and advertising businesses have had flat revenue for years and fell in the first part of this year.
Yahoo! was one of the original Internet "superstar" companies. But it's now worth a fraction of today's big tech players. Facebook is worth 10 times more, and Google parent Alphabet is 14 times more valuable.
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Yahoo!'s core businesses -- that is, if you take away Alibaba and a stake in highly profitable Yahoo! Japan -- include email, search functions, Yahoo Finance and social media company Tumblr. Based on initial estimates, these assets have a combined value of $2 billion to $3 billion.
But, according to Bloomberg, as of the end of April, 10 bids had been submitted for these assets. Media reports suggested that some bidders were willing to pay as much as $8 billion, for assets that any objective analysis suggests are worth a fraction of that. Some of the interested parties have the idea that buying Yahoo!'s core assets "might create synergies" with their existing businesses.
This could be the event that market watchers will later identify as a tech market top. If someone offers to buy a struggling company for multiples of what it's valued at, it could mean the market is getting irrational. And once markets get irrational, share prices tend to head lower -- often in spectacular fashion.
If your memory goes back far enough, you may recall something like this happening before -- especially the part about "creating synergies."
When the first Internet bubble was near its peak in January 2000, media company Time Warner merged with America Online (which is now AOL). Time Warner had content in the form of movies, magazines and cable TV, and America Online had 23 million customers using its dial-up service. The idea was that the merged company would "create synergies" by producing media content (Time Warner) and then delivering it to a built-in subscriber base (AOL). This model was touted as the future of the media business.
The merger was valued at $350 billion, and is still the largest merger in history. The new company was called AOL-Time Warner. At the time, Time Warner president Richard Parsons said the merger was "a pivotal moment in the unfolding of the Internet age."
And he was right -- it was a pivotal moment. It was the event that proved the Internet bubble was about to pop. In the two years leading up to the announcement, the Nasdaq had soared 130%. But by the middle of 2002, it was down 76%.
Immediately after the merger, the new AOL-Time Warner's share price reached $215. By 2002, it had plummeted to $32.
In January 2003, AOL-Time Warner reported a loss of $99 billion. A writedown of AOL's assets was responsible for $46 billion of the loss. This was the biggest annual loss in corporate history.
AOL soon started losing customers in droves to faster broadband Internet suppliers. In September 2003, AOL-Time Warner dropped AOL from its name. Then in 2015, Verizon Communications bought AOL's assets for just $4.4 billion. This was $200 billion less than what it was valued at when the companies merged 15 years earlier. And Time Warner is currently worth $59 billion.
The deal resulted in a loss of $290 billion. It's used as a case study in business schools of how not to do a merger.
In hindsight, the transaction was a classic signal that a bull market -- a bubble, really -- was ending. During the Internet boom of the late 1990s, any company ending in ".com" was viewed as a can't-miss opportunity. Investors ignored company fundamentals and were willing to pay ridiculous amounts for shares of a company that didn't make any money. Once everyone clued in that the valuations were no longer logical, the selling started and the tech crash began.
Which brings us back to Yahoo!, one of the survivors of the first tech crash. It has put its core assets up for sale and there are multiple interested parties. Everyone is once again talking about technology stocks. Apple and Alphabet are the two most valuable companies in the world. And the Nasdaq has finally surpassed the levels it was trading at when the AOL-Time Warner deal was announced in 2000.
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A deal to buy Yahoo!'s struggling core assets for more than they're reasonably worth would only happen in a bull market. It means investors are excited about the market and think there is still money to be made even when overpaying for a company. If it was not a hot market, Yahoo! would not even bother trying to sell.
Of course, the tech market of today is not the same as it was in 2000. Tech stock valuations are more reasonable and many tech companies are world-class businesses. But if someone pays too much for Yahoo!'s assets, or if there is another major deal between two different technology companies, it could be a signal to take some profits on your tech stocks.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.