Why Yahoo Shouldn't Buy Back Its Own Stock

Bill Miller is kicking himself this morning. The second-largest shareholder in Yahoo, he wanted $35 to sell out to Microsoft, and so he held on to his shares rather than hand them over to arbitrageurs at $29 or so. But now that Microsoft has picked up its ball and gone home, Miller has decided that if Ballmer isn't going to start buying Yahoo shares shares then maybe Yang should. He spoke to the NYT's Miguel Helft:

Mr. Miller appeared to be applying some pressure of his own, saying that he expected Yahoo to use a good portion of its approximately $2.3 billion in cash to buy back shares.
"It would be almost incoherent not to do so," Mr. Miller said. "You can't maintain that $33 undervalues your company, have your stock trade below that, and not buy back stock." Analysts say that Yahoo's shares, which closed at $28.67 on Friday, are likely to drop below $25 and perhaps as low as $20 on Monday.

I don't see the logic here. If Yahoo does start buying back its own stock, it will do so in the low $20s, where Miller seems to have shown that he has no interest in selling: he could have sold in the very high $20s at any point in the last few months, and passed up that opportunity.

As a major shareholder in Yahoo, Miller presumably has faith in the company's long-term value: if he wanted a quick exit, he had ample opportunity to take it. So why does he think that the best use for Yahoo's cash is to dole it out to shareholders who do want a quick exit?

Bill Miller, in case you've forgotten, runs something called the Legg Mason Value Trust, and does not run something called the Legg Mason Financial Engineering and Capital Structure Arbitrage Trust. Companies create lasting shareholder value by running a good business, not by running down their cash by shelling it out to exiting merger arbs.

Miller's had a tough time of late: his legendary streak of beating the S&P 500 has been broken for a while, and he's clearly under pressure to perform. If his fund was doing very well, I doubt he'd be talking like this. But it's not, and so he's reduced to asking Yahoo to artificially support the YHOO stock price in the secondary market.

It's not the job of company management to make determinations as to the proper level of the stock price. That's the job of the company board. There are sometimes good reasons for companies to buy back their stock: if there's a big options plan, for instance, a buyback operation stops it from being dilutive. But the worst possible reason to embark upon a buyback plan is because a major shareholder has egg on his face.