By Douglas MacMillan
Yahoo Inc. unveiled a plan to spin off tax-free its nearly $40
billion of holdings in Alibaba Group Holding Ltd., a move that
should give Chief Executive Marissa Mayer more time with
shareholders despite continued declines in the Internet portal's
core advertising business.
Investors have been eager to hear Yahoo's plans to extract value
from its Asian assets, which represent the vast majority of its $47
billion market value, while avoiding a tax bill of billions of
dollars.
After the spinoff, expected in the fourth quarter of this year,
Yahoo will continue to operate its core business and hold its 35.5%
interest in Yahoo Japan.
The new company will own all of Yahoo's remaining shares of
Alibaba, Yahoo said. It will assume no debt in the deal, and Yahoo
will retain its cash. Once completed, the spinoff would let Yahoo
shareholders cash out of Alibaba stock on their own, and also give
the Chinese e-commerce giant the chance to buy the entire entity
and thereby its own shares at a lower tax rate than if it tried to
acquire them now.
In an interview, Chief Executive Marissa Mayer said she decided
on a spinoff around last August, after considering dozens of
alternative structures for unlocking value from the Alibaba shares.
The process consumed almost her entire first two years at the
company and required a small army of bankers and lawyers, she
said.
"We homed in on the spinoff structure over the summer and we
basically spent the fall really refining it," Ms. Mayer said.
"There were a lot of variations on the way to do the spin, what was
included in the spin, was it a reverse spin or a straightforward
spin, which is what we ultimately chose."
A spokeswoman for Alibaba didn't immediately return a request
for comment.
Investors applauded the news, sending Yahoo shares up 5.8% in
after-hours trading. The plan saves Yahoo from paying billions of
dollars in taxes and erases fears that Ms. Mayer would spend some
or all of the value of the Alibaba stake on large acquisitions.
But a spinoff will put more investor focus on Yahoo's core ad
business, which continues to shrink. Yahoo reported on Tuesday that
revenue in the fourth quarter, minus commissions paid to search
partners, declined 2% to $1.18 billion, falling short of analyst
expectations and reversing the small increase in the third quarter.
The company has been hampered by weakness in revenue from display
ads, which has fallen eight of the past nine quarters.
Ms. Mayer failed to address all of the concerns raised last year
by activist investor Starboard Value LP, which also called for
cost-cutting measures and a potential tie-up with AOL Inc. That
leaves open the possibility of a potential proxy fight.
Starboard also may take issue with Yahoo's decision to hold on
to its Yahoo Japan stake, currently valued at about $7.2 billion.
On a conference call with analysts, Yahoo Chief Financial Officer
Ken Goldman said Yahoo is open to exploring opportunities for Yahoo
Japan but stopped short of providing more details.
For AOL, Ms. Mayer said, "we don't see a particularly accretive
contribution. I do think that we have some skepticism around the
synergies that are being posited."
Starboard wasn't able to comment immediately on whether it is
satisfied with the split--which is expected to close after the
expiration of the one-year lockup agreement on Alibaba's IPO. Yahoo
sold shares in Alibaba's initial public offering in September but
still owns a 15% stake.
The spinoff plan gives Ms. Mayer "more ammunition in her battle
against Starboard in terms of trying to win points with investors,"
said Eric Jackson, founder of Ironfire Capital LLC, an investor in
Yahoo. "I don't think they will go away completely."
Bob Willens, an independent tax expert of corporate structures,
lauded Yahoo's move on Tuesday, saying it was the most simple and
effective move the company could have made. Mr. Willens said the
spinoff enables an easy second step, in which Alibaba could buy the
entity with its own shares in a stock-for-stock deal.
Such a deal could happen almost immediately after the spinoff is
completed and avoid the tax bill, as long as Alibaba and Yahoo
haven't negotiated or agreed on such a deal before the spinoff, Mr.
Willens said.
On Tuesday, Yahoo reported its revenue from display ads,
excluding traffic costs, dropped 5% to $464 million in the fourth
quarter, the third straight quarterly decline.
While revenue from desktop display ads continues to shrink,
Yahoo has attempted to offset those declines by investing in newer
businesses like mobile, social, native ads and video. These
businesses together contributed $1.1 billion in revenue and were
the fastest-growing part of Yahoo, Ms. Mayer said on the call with
analysts.
"If broken out on their own they would undoubtedly be one of the
fastest growing startups in the world," Ms. Mayer said.
The CEO also said Yahoo would only consider larger acquisitions
if they fall into one of these four areas.
The company, which reported revenue from mobile for the first
time in the previous quarter, said mobile revenue in the fourth
quarter grew 23% to $254 million. That represents about 20% of
Yahoo's total revenue.
Yahoo hopes to accelerate those sales this year by offering the
mobile ad network it acquired last year with its purchase of Flurry
to all other advertisers. Prashant Fuloria, a former Flurry
executive and veteran Internet product manager, was promoted to
oversee all ad products at the company.
Yahoo overall sold 17% more display ads in the quarter, but
suffered as the average price of those ads fell 20%.
Ms. Mayer said she is currently discussing Yahoo's current
search partnership with Microsoft Corp. and pursuing a possible new
partnership to become the default search provider on Apple Inc.'s
Safari browser for iPhones and iPads. Search revenue, excluding
traffic costs, was flat at $462 million. Paid clicks increased 10%,
and price per click rose 7%.
In all, Yahoo's profit slipped to $166 million, or 17 cents a
share, from $348 million, or 33 cents a share, a year earlier.
Excluding items, the company's earnings fell to 30 cents a share,
from 46 cents.
David Benoitand Lauren Pollockcontributed to this article.
Write to Douglas MacMillan at douglas.macmillan@wsj.com
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