Yahoo Scraps Plan To Spin Off Alibaba Stake, But Will Split Into Two

Yahoo has today confirmed rumors it is scrapping a plan to spin off its stake in Chinese ecommerce company Alibaba. Its shares are up in pre-market trading on the news.

The Yahoo board had been reported to be considering its options on this front this month. An earlier rumor of this plan caused Yahoo shares to spike 7 per cent.

CEO Marissa Mayer said in June the company would move forward with the spinoff of its stake in e-commerce giant Alibaba, having revealed a plan to do this at the start of this year.

However in recent weeks there has been uncertainty about whether or not a spin-off of the stake, worth some $32 billion, would be taxed — with investors fearing a high tax bill and activist Yahoo shareholders threatening a fight.

Today, after what the company said was “careful review and consideration of how to best drive long-term value for shareholders”, the Yahoo board has unanimously voted to suspend the plan to spin off the Alibaba stake.

It said it will instead work on the reverse option for separating the stake — which means it’s planning to transfer all Yahoo’s assets and liabilities other than the Alibaba stake (i.e. its core Internet business) to a newly formed company, thereby creating two separate, publicly-traded companies.

The thinking being this reverse spin off route is less likely to spook investors and the markets with fears of Yahoo incurring a big tax bill.

The bifurcation will still require various third party consents — including shareholder approval and SEC filings and clearance. And even with all that, Yahoo said it may take more than a year for the transaction to be completed.

Commenting in a statement, Mayer reiterated her view that the “ultimate separation of our Alibaba stake will be important to our continued business transformation” — pushing the perception that it’s not the overall strategy that’s being rethought here, just the route to get there.

“In 2016, we will tighten our focus and prioritize investments to drive profitability and long-term growth. A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo’s business,” she said.

However, a Yahoo separated from its high value Alibaba stake could be a target for acquisition, given how little worth is attached to the rest of the company’s assets and business.

According to the FT, several private equity firms and media/Internet advertising firms are interesting in looking at an acquisition of Yahoo. While on Monday telco Verizon* said the group would explore a possible acquisition of the company if it were up for sale.

Without its core Internet business Yahoo would be a very different business: a company with a 15 per cent stake in another ecommerce giant, but no longer an active web player itself — unless Mayer’s plan for Yahoo’s transformation really is a much tighter focus. So more a total reboot than a turnaround of a struggling, veteran web company.

Mayer was hired from Google to be Yahoo’s CEO back in July 2012 with the company saying at the time that she would lead “a renewed focus on product innovation to drive user experience and advertising revenue”.

Three years later the company’s products still struggle to stand out and keep pace, especially with app innovation in the mobile industry. While it faces continued stiff competition on the ad revenue front from the likes of Google and Facebook, although Mayer did ink a new three-year search ad deal with Google this fall.

Commenting on Yahoo’s plans, Andrew Frank, research VP analyst Gartner, told TechCrunch: “I think there’s still a possibility that Yahoo’s core business could continue to evolve independently into a successful diversified digital media company, but it seems clear there will be a lot of investor pressure if it takes this road.”

“I take Marissa Mayer at her word when she says the separation will provide more transparency into the value of Yahoo’s business. Optimistically, this could give Yahoo more maneuverability in M&A activities beyond a fire sale scenario.”

Frank added: “I’ve long held the view that Yahoo is better positioned as a media company than a technology innovator, and that success in media requires overseeing a portfolio of content brands. If Yahoo can’t do this itself then it will be better off joining an organization that allows it to focus on delivering content and advertising and cultivating audiences.”