Yahoo Sells its Stake in Alibaba

Late last night, Yahoo (YHOO: Nasdaq) announced they would spin off their massive stake in China’s internet e-commerce giant Alibaba (BABA: NYSE). This could save the job of their embattled CEO Marissa Mayer who needs to fix Yahoo’s core business.

Yahoo is going to spin off its shares in Alibaba to its shareholders in a tax-free transaction. This stake is worth around $40 per Yahoo share and it is a large chunk of Yahoo’s stock valuation. Investors, including, Starboard Value have been pressuring the company to divest it better.

After the news, in after-hours trading, Yahoo’s stock price jumped seven percent to $51.42. The stock is now approaching its dot com bubble highs.

To the Shareholders this is a Good Outcome

Yahoo’s largest shareholders are pleased with this outcome as it is the best move for the stake in Alibaba. This move should also extend the life of their CEO during the upcoming proxy season. The deadline for the election of new board members is March 27.

At this time, there was no official comment from Yahoo.

Without this announcement, we would have seen a problem within the company and in all likelihood, Mayer would have been fired. Now she has another three quarters to prove herself, along with their Chief Financial Officer (CFO) Ken Goldman, to fix the core business.

Assuming the sale value of the Alibaba spinoff, with 35% tax, would have happened in normal sale channels, the value of this sale creates $14 per share in added value through cost savings. Since activist investor, Starboard took a majority stake in Yahoo, they have been pressuring the company to merge with rival AOL (AOL: NYSE), selloff its stake in Yahoo Japan and fix its core business via mergers created added value to shareholders. This should satisfy Starboard for now. However they have yet to comment as well.

The Future of Yahoo is Murky

Shareholders have mixed views on what Mayer should do in the coming months. Some are hoping for a tax-free spinoff of Yahoo Japan and others want to merge with a company, such as AOL. However, the core business of Yahoo is the major focus of scrutiny. With Alibaba in the picture, Yahoo was too small to be of concern. With Alibaba gone, shareholders will want to see the problems fixed.

If you take away the $40 in share of what Alibaba was worth from the stock, Yahoo is worth only $11 per share. The company also has nearly $6 per share in cash and the stake in Yahoo Japan is worth nearly $7 per share. This means, analysts still have a negative valuation on Yahoo stock.

What can be done to improve the core business? The main problem is the higher costs the company faces in the wake of shrinking advertising money. There are some encouraging signs as the company is expecting increased revenue from its mobile, video and social areas to offset the shrinking advertising revenue.

The problem for Yahoo is that it has problems generating enough income from ads that it sells. In the final quarter of 2014, display ad price fell 20 percent. There is serious competition from Google (GOOG: Nasdaq) and Facebook (FB: NYSE). These two companies specialize in adapting ads to cater to a specific consumer profile. Something Yahoo is poor at.

Investors and shareholders are thankful for this gift of Alibaba. Now the pressure is on Yahoo to fix the core giving their CEO and CFO a new and difficult challenge to face.