Yahoo Said to Scrap Alibaba Spinoff, Explore Web-Unit Dealby and
Shift would be admission of defeat for CEO Marissa Mayer
Investors voiced concerns spinoff might not be tax-free
Yahoo! Inc. will scrap the long-planned spinoff of its stake in Alibaba Group Holding Ltd., according to a person with knowledge of the matter, under pressure from investors concerned about the tax risks of the deal.
The Web portal will instead explore a spinoff of its main Internet businesses, said the person, who asked not to be named because the decision hasn’t yet been made public. The shift came after Yahoo’s board convened last week to consider options for the company’s future, including whether to press ahead with the Alibaba divestiture after questions arose about whether the transaction would be tax-free.
The reversal is an admission of defeat for Chief Executive Officer Marissa Mayer, who was brought aboard in 2012 to revitalize the once-dominant Internet brand yet has struggled to find the right strategy to return the company to growth. With sales hovering around 2006 levels, investors’ patience has begun to wane, and activist shareholder Starboard Value LP last month called for the company to drop the Alibaba spinoff and instead to sell off its Web businesses -- or risk a proxy fight.
Yahoo declined to comment. The stock rose 3 percent to the equivalent of $35.91 at 10:52 a.m. in Frankfurt, having jumped as much as 3.8 percent in extended U.S. trading after CNBC first reported the change in plan. The TV network also said the company is considering options for its stake in Yahoo Japan Corp. The shares have lost 31 percent in New York this year.
While Mayer has until now persisted in talking up prospects for the Internet businesses, such as search, advertising and media content, investors have been focused on the valuable stake in Alibaba -- and concerns about taxes. That holding, about 15 percent of the Chinese e-commerce company, is worth more than $30 billion. Yahoo’s total market value is about $33 billion.
Mayer unveiled the plan to spin off the Alibaba stake in January. In October, she said the stake, which has helped prop up Yahoo’s stock price, was on pace to be divested by next month. Investors who had initially pushed for the spinoff grew concerned about the transaction when Yahoo failed to get prior approval from the U.S. Internal Revenue Service on its tax-free status. Going forward with the spinoff plan would carry the risk of getting hit with a tax bill of more than $10 billion, while selling Yahoo’s main business would turn the company into a shell that owns shares in Alibaba and Yahoo Japan, without the possible tax burden.
Sunnyvale, California-based Yahoo -- which paved the way for consumers to access and navigate the Internet in the 1990s -- has lost ground to younger rivals such as Google and Facebook Inc. Yahoo’s share of U.S. digital advertising spending is forecast to fall to 3.5 percent in 2017, from 11.5 percent in 2009, according to EMarketer Inc. The company’s annual sales peaked at $5.4 billion in 2008, and are projected to slip 8 percent this year to $4.04 billion, minus revenue passed on to partner sites.
If the company’s board were to seek a sale of the Web business, telecommunications giant Verizon Communications Inc. would explore a possible acquisition, Verizon Chief Executive Officer Lowell McAdam said Tuesday at a Business Insider conference. His comments echoed remarks by his chief financial officer, Fran Shammo, who said Monday the company would look at a possible deal with Yahoo “if we see there is a strategic fit and it makes sense for our shareholders.”
Verizon bought Yahoo rival AOL Inc., another Internet pioneer, earlier this year for about $4 billion.
The core Yahoo business could attract a valuation of $3.5 billion or more, depending on the buyer, according to Robert Coolbrith, an analyst at CRT Capital Group. Others have said it could be worth less than $2 billion.
Pulling back from the spinoff is a significant change for Yahoo executives who had stood by the deal even as questions were raised about whether it could escape scrutiny from the IRS. At the time of the announcement in January, Mayer said the transaction was the culmination of more than two years of work with advisers to unload the shares in a tax-efficient manner.
Mayer said in October that the company would share details in coming months about a strategy for Yahoo’s success after the spinoff. Under her leadership, the company has devoted resources to expanding mobile and other new advertising around video and other formats. Yahoo also signed a new deal with Google that could help boost the search business.
Still, Mayer’s efforts have so far failed to show significant progress. She also has lost several executives in recent months, 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.