Yahoo's Options Range From Quick Sale to Muddle Amid Slump

Is Yahoo Really Considering Selling Its Search Business?
  • Board meets to consider company's future, including core sale
  • Mayer failed to deliver a turnaround after three years as CEO

As Yahoo! Inc.’s board convenes this week, the Web portal is considering a number of options to cope with a slump in growth. One is scrapping the spinoff of its stake in Alibaba Group Holding Ltd., and another is the sale of its main Internet business, according to people familiar with the matter.

Directors may quickly conclude that while each has its merits, none of the scenarios is particularly appealing.

Marissa Mayer
Marissa Mayer
Photographer: Simon Dawson/Bloomberg

Chief Executive Officer Marissa Mayer, after more than three years at the helm, has failed to deliver on a turnaround as Yahoo’s sales slide and market share shrinks in an otherwise healthy online ad market. She had counted on a spinoff of the Alibaba stake to placate investors, yet that plan has come under fire after the Internal Revenue Service raised concerns about the tax impact. The 15 percent stake in Alibaba is crucial to investors who assign a majority of the stock’s valuation to the Chinese e-commerce company.

"There’s a lot of uncertainty around the tax implications of the spin," said Brett Harriss, an analyst for Gabelli & Co. in Rye, New York. "The spin is good -- but it’s not going to solve the problems if the core business continues to suffer."

Stock Rises

Investors bid up the stock on news the board is mulling its options with shares climbing the most in more than six months. They were trading at $35.52 at 2:25 p.m. in New York.

Discussions of nixing the spinoff come less than two months before it’s set to be completed -- a slight delay from the initial aim of closing it at the end of this year.

The company first announced plans to exit Alibaba in January. An IRS official raised concerns about such deals in May -- and declined to endorse the spinoff in September. Yahoo had said it would still push ahead with the divestiture, pending a review from its legal counsel and other conditions.

Killing the transaction could calm investor concerns, especially if Yahoo were to sell the core business instead and leave Alibaba with the current company. Essentially, it’s accepting a smaller tax hit instead of gambling on no tax hit under the current plan.

The tax liability for Aabaco Holdings Inc., the name of the spinoff, could range from $8 billion to $13 billion, according to Robert Coolbrith, an analyst at CRT Capital Group. If the company were to sell the core business, the tax hit would likely be $1 billion to $2 billion.

Attracting Suitors

Yet scrapping the spinoff would upend several quarters of effort in a deal that was meant to make investors happy. Tax issues have long been a thorn for the Alibaba stake and Yahoo shares climbed when word of the deal was unveiled. Yahoo itself has said that the IRS official indicated a decision isn’t likely to be retroactive, making the spinoff a good option.

If the company were to put its core business up for sale, it could attract bids from a variety of suitors, including strategic buyers and private-equity firms. Yahoo, despite its struggles, still touts a user base of more than 1 billion with advertising sold against various properties such as finance, sports and search.

Some of the companies that might purchase Yahoo’s core business include Verizon Communications Inc., which earlier this year snatched up rival AOL for about $4 billion, and Comcast Corp., which could use the Web portal to help expand its digital offerings. Others include AT&T Inc. -- or even Alphabet Inc. or Twitter Inc.

Silver Lake is among the key private equity firms that could make a bid for the company.

The value of Yahoo’s core search and display-ad business is about $3.5 billion with private equity possibly willing to pay $5 billion or more, according to Coolbrith.

"We believe that demand for Core could emerge from a number of private equity bidders and a handful of strategics," Coolbrith wrote in a note.

Elusive Success

While some may root for the company to put itself up for sale, this wouldn’t be a simple process. Yahoo would have to convince a buyer that it can find success in a market where rivals are growing and it is not. In 2015, Yahoo will capture $3.37 billion in digital ad revenue worldwide, or 2 percent of the market, according to EMarketer Inc. That’s down from a 2.4 percent share in 2014.

The Yahoo brand name will probably take away from the price. Already, some analysts value the core business of the company at less than $2 billion. Selling at around that price would almost certainly be seen as an admission of defeat rather than a declaration of victory.

“I think the biggest problem that Yahoo will have is that if they shop this around they’re not going to get the value the board and investors want,” said Dan Rayburn, principal analyst at Frost & Sullivan.

Pressure Builds

The other option is for Mayer to stay the course, proceed with the spinoff, and continue to polish the turnaround. Mayer and her executive team have insisted they’re working hard to succeed after the company sheds Alibaba.

Mayer said in October that the company would share the “details of this plan” at the next earnings release, if not sooner.

“This long-term strategy will not be defined by a single quarter,” she said in announcing disappointing sales. “Over the next few quarters, we’re working to differentiate our product."

Already, the company has devoted resources to expanding mobile and other new advertising around video and other formats. Yahoo also touted a new deal with Google that could help boost the search business.

Yet more of the same can’t be reassuring to investors. Yahoo stock shed 33 percent this year through Tuesday and Alibaba fell 19 percent.

Some high-ranking staffers have raised concerns as well. Mayer has lost several executives in recent quarters, including Jacqueline Reses, Yahoo’s chief development officer, who had shifted her focus this year to the Alibaba share sale. Kathy Savitt, who had been Yahoo’s chief marketing officer, left earlier this year.

"The pressure is building on Yahoo," said Colin Gillis, an analyst with BGC Partners.

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