Wednesday, November 07, 2007

Massive Market Irrationality in Alibaba IPO?

I'm no economist, so I'm really looking for some clarity.

3 Steps to a Massively Irrational Market

Step #1: Yahoo buys 39% of Alibaba's holding company.

Step #2: Today, the Alibaba IPO skyrockets its market cap to $164B. Yahoo's stake should be worth $64.2B.

Step #3: Today, Yahoo's market cap remains at $37.72B.

What am I missing here, people?

Link: Efficient market hypothesis

Update (4 pm, 11/7/07): When you quickly post something to your blog, only to later realize that you've made a big blunder, there's a temptation to redact the mistake. In this case, I'm going to resist the temptation to erase and leave the mistake up.

Alibaba is worth 164.71 billion Hong Kong Dollars, not US Dollars. In US dollars, Alibaba's currently worth 21.21B USD. Thus, Yahoo's 39% share of this company is hypothetically worth 8.27B USD, not 64.8B USD.

The market may still be behaving irrationally regarding the relative valuations of Alibaba and Yahoo (After all, Yahoo does now own an asset that went from being worth 2.75B USD last week to being worth 8.27B USD this week. Its share price has not moved in accordance with the increased value of this asset.), it's just not irrational on a truly massive scale.

1 comment:

SaxBoy said...

Perhaps the market is betting that Yahoo will, in its hubris, fail to capitalize its share of the company until after it crashes... or that the sale of 39% of the company will, in fact, crash the price so fast as to make such an action less probable. More FedSpeak later.