CUPERTINO, Calif. — Yahoo Inc. made investors happy by announcing a spinoff of its nearly $40-billion stake in Alibaba Group Holding, but the move won't add money to Yahoo's coffers — or mask the company's continued problems with its core business.
For months, Yahoo had been under mounting shareholder pressure to do something with its massive 15.4% holding in the Chinese Internet giant. It gave in on Tuesday, saying its entire Alibaba investment would be placed in a separate, publicly traded company called SpinCo.
All of Yahoo's 384 million Alibaba shares will be transferred tax-free to the new company, saving the beleaguered Sunnyvale, Calif., billions in taxes it would pay if it sold the shares on the open market.
"We made the conscious decision to distribute 100% of our Alibaba shares because we felt maximum tax efficiency was important," Yahoo Chief Executive Marissa Mayer said in a call with analysts after announcing the move, which she said the company arrived at after an "exhaustive" two-year review.
"With today's plan for a tax-free transaction, we stand to realize $3.31 billion of additional tax savings."
Stockholders sent Yahoo's shares soaring after hours. Shares gained $3.61, or more than 7.5%, to $51.60 in extended trading.
James Angel, associate professor of finance at Georgetown University's McDonough School of Business, said the spinoff was a clean way to get Alibaba's value into the hands of shareholders. It also alleviates shareholder fears that Yahoo would use the holdings to buy smaller companies.
"By doing this, Yahoo doesn't get any cash, but they're giving value to their shareholders," he said. "This deal is good for shareholders. It remains to be seen if it will be good for Yahoo."
Yahoo continues to struggle, despite the high-profile appointment of Mayer as CEO in 2012 and a subsequent string of acquisitions.
Although the Alibaba news overshadowed Yahoo's weak fourth-quarter earnings report Tuesday, it didn't hide it completely: For the three months ended Dec. 31, Yahoo reported that total revenue declined 1% year over year. Earnings per share fell to 17 cents, down from 33 cents a year earlier.
Yahoo's Alibaba investment has long been its golden egg, accounting for 85% of Yahoo's $47-billion market value.
Without it, Mayer will be in charge of a much smaller, much less valuable Yahoo — and one that doesn't appear to have a game-changing turnaround in sight.
The spinoff "does not solve Yahoo's fundamental strategic problems," Angel said. "They're stagnant in their core business. They don't have a search engine as good as Google's. They're in a difficult strategic position. So what are they going to do about it?"
For now, that doesn't seem clear.
In the call with analysts, Mayer said "the core of Yahoo's business is returning to health and stability and, we believe, growth" without offering too many specifics on the quarters ahead. She called out Yahoo's key areas of investment — mobile, video, native ads and social — saying that those are the fastest-growing areas of digital advertising.
She noted that Yahoo has been reallocating resources at the company "away from legacy businesses and towards future-oriented activities" by mixing up where employees are deployed and through acquisitions.
The company certainly buys itself some much-needed time with the spinoff.
"Marissa Mayer has done well for shareholders in the step she just took, so she might have a few quarters to change things around," said B. Riley & Co. analyst Sameet Sinha. "If she can get [revenue and profit] back to stable ground, that would make people happy. And of course, revenue growth from then on."
Alibaba, an Internet juggernaut based in Hangzhou, China, went public on Wall Street in September in the largest IPO of all time. The total haul from the IPO was $25.03 billion. In that deal, Yahoo sold Alibaba stock worth more than $9 billion and took a tax hit.
Yahoo's savvy investments in Alibaba and Yahoo Japan have helped triple its stock price since Mayer joined the company. Yahoo said it would retain its nearly 36% stake, at a current market value of $7 billion, in Yahoo Japan.
Post-split, Yahoo will consist of its core operating business, net cash and its ownership in the Yahoo Japan joint venture. SpinCo will hold the Alibaba shares as well as a legacy ancillary business; the new company will not assume any debt as part of the transaction.
All Yahoo shareholders will receive proportional shares in SpinCo and keep their existing Yahoo stock until they decide to sell it. Holders of SpinCo shares will be subject to the capital gains tax if they sell SpinCo stock. Yahoo said it intends to complete the spinoff by the end of the year.
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