Yahoo scraps spinoff plan for Alibaba

In January, when Yahoo Inc. announced plans to spin off its $31-billion stake in Chinese e-commerce giant Alibaba, there was talk of how it would liberate Yahoo to focus on its core business of Internet search and content ranging from news to stock market investor tools to online TV shows.

Twelve months later, Yahoo still plans to split off its Alibaba shares, but in a different way. And the focus no longer is on liberation, but on the possibility of selling off its mainstay business.

The Sunnyvale, Calif., company announced Wednesday that it would halt the planned spinoff of its valuable stake in Alibaba, and instead spin off the rest of its assets — including Yahoo.com and its stake in Yahoo Japan — into a separate company.

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The reasons for the change are technical and involve tax planning. But bottom line, it means that the troubled company can more easily sell itself to willing buyers, if it can find any.

Yahoo shareholders will end up with stock in both companies. The spinoff is expected to take a year or more to conclude. Yahoo did not state who would be in charge of each company or what the company names would be.

Analysts described the move as the same thing in a different wrapper.

“It’s achieving the same strategic benefits, but in a backward sense,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. “Instead of spinning off Alibaba, which could have resulted in a huge capital gains tax bill, they’re spinning off their core assets, where the tax hit will be much less.”

Where analysts, pundits and many investors seemed willing earlier in the year to give Chief Executive Marissa Mayer a chance to turn the company’s fortunes around by focusing on its Yahoo-specific businesses, patience appears to have grown thin. Analysts and investors now are talking about ways that Yahoo can maximize its value for potential mergers or acquisitions.

A Web pioneer, with a search engine that preceded Google’s, Yahoo has been in trouble for years under a succession of CEOs who tried to make sense of what has become a strategic hodgepodge. After three years in charge, revenue under Mayer remains flat as the company struggles to adjust to a changing Internet advertising market.

According to Yahoo, though, the latest twist on the spinoff was driven by “the market’s perception of tax risk” associated with the Alibaba spinoff.

“The board remains committed to accomplishing the significant business purposes and shareholder benefits that can be realized by separating the Alibaba stake from the rest of Yahoo,” Maynard Webb, chairman of Yahoo’s board of directors, said in a statement. “To achieve this, we will now focus our efforts on the reverse spinoff plan.”

Financial analysts described the move as prudent because, given the volume and value of the Alibaba stock, even a small chance of tax-related complications could potentially put Yahoo on the hook for a tax bill that could exceed $10 billion.

The company originally believed that its Alibaba spinoff plan would be tax free, but after the IRS declined to confirm that this would be the case, the transaction was cast in doubt.

“I’m not sure anyone wants to see a situation where Yahoo pursues this and in 2018, the IRS writes to the company indicating Yahoo owes taxes on that transaction,” said Scott Kessler, deputy director of global equity research at S&P Capital IQ.

Numerous investors asked Mayer and Webb on an official conference call Wednesday whether the reverse spinoff was forging the path for a sale of the company’s core assets, to which both executives said, in effect, no such plans are in the works.

“But what’s interesting is on the conference call with the chairman, Maynard Webb, when someone asked whether Yahoo was looking to sell the company’s core operations and assets, his choice of words was very generic and very carefully chosen,” Kessler said. “He indicated they had not explored the sale of core operations and assets. Did he say they would not do that if approached? No.”

Activist investors such as Starboard Value, a hedge fund that had been pushing for Yahoo to sell its core business instead of spinning off its Alibaba stake, wrote to the company last month arguing that by holding onto the core business, “the potential penalty for being wrong is just too great, and the potential rewards for being right is not materially better than the other alternative.”

On the conference call, Mayer said Yahoo’s board believes that its core business “remains very undervalued, and we’re focused on unlocking that value.”

The real question now, Angel said, is how Yahoo can best add value. Does it give being a media company another shot? Judging by the results of its previous efforts, investors may not be too keen on that approach. Does it find a buyer or another firm with which it can merge?

“You can play very interesting parlor games and think who they might hitch up with,” Angel said. “Microsoft is an obvious candidate, so is Google and so is AOL for that matter, and you could spin a story about how any of them might want all or part of Yahoo. But would they be willing to pay a high enough price to get Yahoo to be willing to sell?”

According to Andrew Frank, an analyst at research firm Gartner, Yahoo is essentially back where it was a year ago, talking about a spinoff and trying to define the identity and value of its core business.

Wednesday’s reverse spinoff announcement isn’t going to solve Yahoo’s ongoing problems, Frank said. “In fact, it looks like the biggest beneficiaries will be the tax lawyers.”

Yahoo shares fell 45 cents, or 1.3%, to $34.40 on Wednesday.

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