Yahoo Records $273 Million in Gains From Hedges on Yen

Yahoo! Inc. has recorded $273 million in gains resulting from steps taken to guard against swings in the Japanese yen that can affect the value of its Asian operations.

After using forward contracts to lessen foreign-exchange risk related to its stake in Yahoo Japan Corp., the company had a pretax gain of $270 million in the first quarter of 2013 and $3 million for last year, Sunnyvale, California-based Yahoo said in a regulatory filing today.

Investors have applauded oversight of the company’s $5.4 billion in cash by Chief Executive Officer Marissa Mayer. Most of the sum was gained through the sale of half of Yahoo’s stake in Alibaba Group Holding Ltd. The decision to hedge against the yen -- the worst performing major currency against the U.S. dollar this year -- gives reassurance that management is carefully stewarding resources, said Paul Sweeney, an analyst at Bloomberg Industries.

“They certainly positioned themselves as savvy currency traders with these results,” Sweeney said.

The yen has lost 12 percent of its value this year amid efforts by the Bank of Japan to stimulate growth by letting the currency weaken. A falling yen can help the economy by boosting the value of overseas sales. Yet for Yahoo, which co-owns Yahoo Japan with SoftBank Corp., the decline carries risk, reducing the value of assets in the country.

Forward Contracts

“In December 2012, we began hedging, on an after-tax basis, our net investment in Yahoo Japan with forward contracts to reduce the risk that our investment in Yahoo Japan will be adversely affected by foreign currency exchange rate fluctuations,” according to Yahoo’s filing.

Forward contracts give the right to purchase a currency at a certain price at a prearranged date, helping protect the holder against a change in a currency’s value.

“If the Japanese yen depreciates at maturity from the forward contract execution rates, we will receive a cash settlement, which may be material,” Yahoo said. “We have elected to apply net investment hedge accounting and expect the hedges to be effective.”

The estimated value of the forward contracts was $3.2 billion at the end of March, according to the filing. The fair value of the assets was included in prepaid expenses and other current assets on the company’s balance sheet.

Alibaba Stake

Yahoo gained 3.6 percent to $26.07 at the close in New York, resulting in the biggest gain since Oct. 23 and the highest level since June 2008.

The value of Yahoo’s remaining stake in Alibaba rose as China’s largest e-commerce company posted profit that doubled in the three months ended December. Net income at Alibaba jumped to $642.2 million in the quarter, from $236.9 million a year earlier, according Yahoo, which owns about 24 percent of Alibaba.

Yahoo also said it extended a search-advertising pact with Microsoft Corp. which had expired at the end of March. Under the new agreement, Microsoft will continue to guarantee search-ad revenue to Yahoo through the end of March 2014.

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