Marissa Mayer, chief executive of Yahoo, said on Tuesday that the internet company would spin off its 15.4% stake in Alibaba, China’s leading e-commerce company, into a separate company.
The decision, which Wall Street has been waiting for since Mayer joined the company in 2012, cheered shareholders because they will directly reap all the remaining profit from Yahoo’s prescient investment, which cost almost nothing a decade ago but is now worth about $39.5 billion.
In the process, Yahoo will avoid any taxes on the transaction but will be stripped of its single most valuable asset. The Alibaba stake alone now makes up nearly 85% of Yahoo’s market value.
Resolving the Alibaba question now turns the spotlight on Mayer’s plans to turn around Yahoo’s core internet advertising business, which has dealt with years of declining revenue as advertisers and internet users switched their money and attention to flashier, more innovative services from competitors like Google, Facebook and Twitter.
Mayer delivered a report card on her turnaround plan on Tuesday, noting that overall revenue and profit fell in the fourth quarter. But the company’s mobile businesses, as well as other newer initiatives, like so-called native ads, showed rapid growth.
Still, the immediate reaction to the Alibaba announcement was positive, with investors driving Yahoo’s stock up about 7% in after-hours trading after disclosure of the plan.“It’s kind of hard not to view it as an unadulterated positive,” said Mark Mahaney, who follows the internet industry for RBC Capital Markets. “This was the single biggest issue raised by activists.”
The Alibaba news overshadowed Yahoo’s report on its fourth-quarter results, which gave little indication that Mayer’s turnaround plan was taking hold.
Yahoo reported revenue of $1.25 billion and adjusted profit of 30 cents a share in the quarter, slightly exceeding Wall Street’s expectations. Analysts had on average expected the company to report revenue of $1.18 billion and adjusted earnings of 29 cents a share, according to data collected by S&P Capital IQ.
The company’s net income was $166 million, or 17 cents a share, in the fourth quarter, compared with $348 million, or 33 cents a share, in the same quarter a year ago.
Yahoo sold a hefty chunk of its stake in Alibaba in September when the Chinese company sold shares in an initial public offering. Yahoo had a $10.3-billion gain from the sale, but nearly 40% of that was eaten up by taxes.
Yahoo executives promised shareholders that they would find a way to dispose of the rest of the Alibaba stake in a way that incurred a much lower tax bill. Their solution — a spinoff of the Alibaba stake and a Yahoo operating business — avoids $16 billion in corporate taxes that Yahoo would have owed if it had simply sold the stake, executives said. Investors will receive shares in the spun-off entity in proportion to their stakes in Yahoo. The spinoff is expected to be completed in the fourth quarter.