Struggling internet giant Yahoo (YHOO) is scrapping its plans to spin off its 15% stake in Alibaba (BABA), according to the company. The decision comes after deliberations last week by Yahoo’s board about whether the company should spin off BABA, sell Yahoo’s core business, or do both.
Instead, the company decided to do neither, keeping its roughly $31 billion stake in Alibaba under its Yahoo name, and instead spinning off the remainder of the business, including Yahoo Japan and Yahoo’s core internet business, into another company.
The move is designed to save YHOO stock holders billions of dollars, as the Internal Revenue Service refused to tell Yahoo whether a spinoff off its BABA holding would be taxed aggressively.
The taxes on the “reverse spin,” on the other hand, are much more visible and far lower than the worst-case BABA scenario.
Shares of YHOO stock were up about 1% in early trading on news of the deal, but are down 1.5% as of this writing.
What Investors Should Know
If you own YHOO stock, there are a few things about the plans announced today that you should know.
Structure: The company known as Yahoo will merely morph into a holding company for BABA stock. The rest of the company will be spun off into a different company with a different stock ticker, and all current YHOO shareholders will end up owning shares of both companies. The deal is expected to take about a year to complete.
The deal may indeed unlock value: One of the stated reasons for spinning off anything at all was so that the market could more fully value Yahoo Japan and YHOO’s core internet business. Currently, Yahoo has a market cap of about $33 billion, while its BABA stake is worth about $31.8 billion. The holding in Yahoo Japan and its core business are valued at just $1.2 billion, but the Yahoo Japan stake is actually worth $8.5 billion and the rest of Yahoo is worth between $3 billion and $8 billion, according to analysts.
A buyout could still happen: With the current deal set to take a year to complete, bidders could ultimately still swoop in and buy Yahoo’s core business, Yahoo Japan, or both divisions.
Marissa Mayer ultimately still hasn’t accomplished much: You’ve gotta wonder how long the Mayer experiment will continue, with pressure from the likes of Facebook (FB) and Google (GOOG, GOOGL) making it tough for Yahoo to gain much sway in online advertising.
The turnaround Mayer was hired to execute in 2012 hasn’t come to fruition, and the vast majority of YHOO stock’s performance over the past five years has been driven by the BABA holding, not Yahoo itself or anything Mayer has been able to do.
The Yahoo reverse spin should be able to bring shareholders marginally more value, but by no means is it a long-term fix. While YHOO may be a good stock to trade right now, I’m not sure it’s a good company to invest in.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
