They owned shares in Alibaba that had a market value of $4b more than Yahoo's market cap, which in theory should have reflected the value of Alibaba plus all the other assets.
Most of the value of the stock was based on their shares of Alibaba. The Yahoo component was largely worthless but the indirect shares of Alibaba are/were valuable.
It's only Alibaba stock they hold that creates any "value" in Yahoo.
"The latter part of the business is clearly pulling the former along. Here’s how to think about it: Yahoo has a stock market value of $34.1 billion, and owns a 24 percent stake in Alibaba. Estimates for the current value of Alibaba, which is planning an IPO, range between $75 billion and $125 billion. If it comes in at the low end of that range, Yahoo’s stake would be worth $18 billion, or just over half of Yahoo’s total market value. At the high end, Yahoo’s stake in Alibaba would be worth $30 billion—which would imply that the rest of Yahoo’s enterprise is worth as little as $4 billion, or 12 percent of its current value."
At one point the stock was actually trading less than what alibaba + Yahoo japan was worth. Effectively the Yahoo business was worth pretty much 0 dollars at least to the market. It seems unfair when you make so much money for pretty much not doing anything for the core business.
At the time, most of the share value was in Yahoo's core business. If this was Microsoft's way to buy a stake in Alibaba, it was a very expensive way to do so.
The funny thing is that Yahoo's alibaba stake + cash on hand is worth something like 40 billion, but yahoo's current market cap is ~35 billion. AKA, Yahoo's core business is worth negative 5 billion dollars.
Yahoo would need to pay taxes on it's gains on the other companies stock before it could return that money to it's shareholders so effectively that stock is worth less than it's stated value. Also, Alibaba is not a public company so there is a fair amount of uncertainty in it's value.
That's all because of alibaba. Yahoo would be worth around $80-$90 if they had sold to MSFT or may be even more as they wouldn't have sold part of alibaba share like marissamayer did last year or so. would have, could have.
It should be noted that Yahoo owns 20% of Alibaba. With Alibaba announcing its IPO plans earlier this year, yahoo's stake is worth between $13B to $18B. Most of the share price increase is because of this. Not because Yahoo's core business has gotten better. Yahoo is worth $31B today. So almost 1/3 to 1/2 of Yahoo's valuation is its stake in Alibaba. In 2008, nobody knew how big Alibaba would get.
I am still flabbergasted at how Yahoo is listed so low. If Alibaba hits their target, Yahoo's ownership will be worth about $35bil. Yahoo's current market cap is around $39bil (and is near it's 52week high). That means that the market valued Yahoo at about $4bil as its own company, which seems terribly low for a company that took in $1bil in earnings last call.
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