Yahoo! Inc. (NASDAQ:YHOO) has been an enigma over the last few years.
YHOO stock more than tripled from 2012 through the end of 2014, even as the core Internet business remained under pressure. That’s because Yahoo! Inc. enjoyed a lucrative stake in Alibaba Group Holding Ltd. (NYSE:BABA).
Now Yahoo is in deep trouble thanks to continued challenges to its core, and pressure on Alibaba stock on top of that. The Chinese e-commerce giant is down double-digits from where it began trading in late 2014, and BABA stock is now half its post-IPO high.
YHOO stock holders have been wondering how CEO Marissa Mayer plans to right the ship. And the answer, it appears, is that she won’t.
According to reports, Mayer and the Yahoo! Inc. board are seriously discussing breaking up YHOO stock into pieces and selling it off.
Yahoo! Inc. Parts Are Worth More Than the Whole
A Wall Street Journal report indicates that the board of YHOO stock will meet across this week to determine whether to sell off its remaining Alibaba stake, whether to spin off part of the Yahoo! Inc. Internet business including its websites and e-mail, or perhaps to even do both.
Investors should not be surprised. For starters, spinoffs are the fashionable way for publicly traded stocks to “unlock value.”
There have been a few big spin-offs in the last year or so. Paypal Holdings Inc. (NASDAQ:PYPL), a mobile payments company, was recently removed from eBay Inc. (NASDAQ:EBAY). Also, the computer and printer division of HP Inc. (NYSE:HPQ) has been separated from the server-focused Hewlett Packard Enterprise Co. (NYSE:HPE).
Some, like activist investor Carl Icahn, claim these moves “unlock value” … and they do, at least in the short-term. As Berkeley law professor Steven Davidoff Solomon wrote in a 2011 Dealbook column:
“Two university professors, Chris Veld and Yulia V. Veld-Merkoulova, have analyzed studies of spinoffs. On average, studies have found that a spinoff announcement results in an abnormal stock gain of about 3 percent.”
Of course, Davidoff Solomon also writes:
“In the longer term, researchers found, spinoffs do not produce gains over and above other similar stocks. One explanation is that the short-term gain is more a result of the anticipation of the spinoff than the actual event.”
To be clear, talk of spinning off Yahoo’s Alibaba stake is not exactly news. InvestorPlace contributor Brian Nichols mused on this topic back in October when the YHOO stock board was trying to decide whether to go forward with the move, even in the face of a steep tax burden. Nichols, like many other investors, was strongly in favor of the move.
But now, it appears that the spinoff is a foregone conclusion.
YHOO Stock Leaders Give Up
Spinoffs are nothing new, but the specific circumstances around YHOO stock right now make this news particularly noteworthy.
Everyone knew that the reason for such a spinoff was to take perhaps the only part of Yahoo! Inc. with long-term appeal and cash out for the benefits of shareholders and the hopes of funding a turnaround.
It has long been noted that the core Internet business of YHOO stock — that is, online advertising on its network of websites — has been completely overlooked by Wall Street and valued at next to nothing. That’s because of poor growth prospects and plenty of wasteful spending in recent years on ill-advised acquisitions both small and large (like the $1.1 billion purchase of Tumblr).
For YHOO stock to essentially wave the white flag and admit that someone else out there knows better is a huge deal. Whether it’s a bigger tech company like Alphabet Inc. (GOOG, GOOGL) or simply a private equity firm that knows how to do more with less, Yahoo! Inc. is essentially admitting that it doesn’t know how to move forward.
That kind of capitulation means the end.
After all, even if the company doesn’t wind up selling off its core, the mere fact that option is on the table acknowledges that leadership is so pessimistic that it’s looking at tearing the company into pieces and auctioning off the parts.
Once management enters that mindset, there’s no turning back.
It may not be today and it may not be this week, but this is the way Yahoo is going to die.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.