Yahoo Changes Course Under Pressure, Weighs Core Web Spinoff

  • Bundling Web assets will give investors clearer value
  • Board has `fiduciary obligation to engage' any offer

Has Yahoo's Mayer Admitted Defeat on Alibaba?

Yahoo! Inc. is changing course. Again.

After scrapping long-held plans to spin off its valuable stake in Chinese e-commerce provider Alibaba Group Holding Ltd., Yahoo is now considering bundling the rest of its assets -- including its Web business and stake in Yahoo Japan Corp. -- into a standalone company.

If Yahoo presses ahead and jettisons the core business, that would give investors a clearer value of those assets, and could make it easier for any suitor to decide whether to make a bid.

It’s a “complex transaction,” Yahoo emphasized repeatedly on a call with investors, but one the board decided was necessary. The stock was getting hammered amid concerns that spinning off the Alibaba stake -- worth more than $30 billion -- would involve a tax bill that could exceed $10 billion. Some investors were also getting fed up with the company’s inability to generate sales growth since Marissa Mayer took over as chief executive officer in 2012.

“A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo’s business,” Mayer said in a statement.

The new plan is less risky for Yahoo, especially after the company didn’t get an endorsement from the U.S. Internal Revenue Service for the original deal earlier this year, according to Scott Levine, a tax partner at the Jones Day law firm. The pieces of the business with less appreciation should get picked for any spinoff, he said.

“This makes unbelievable sense,” Levine said. “The original spinoff as structured would work, but they were taking on more risk than necessary.”

Shares Slump

Investors didn’t cheer the move. Yahoo shares fell as much as 4.9 percent, before recovering somewhat to end the day down 1.3 percent at $34.40. That brought the decline this year to 32 percent.

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, or selling off the company’s core assets.

With sales hovering around 2006 levels, investors’ patience had begun to wane, and activist shareholder Starboard Value LP last month called for the company to drop the Alibaba spinoff and instead sell its Web businesses, or face a proxy fight. After engaging with Yahoo for months and imploring Mayer to make changes to boost the company’s value, Starboard said in a Nov. 19 letter that “there has been little evidence of a turnaround” and “recent results are actually moving decidedly in the wrong direction.”

Starboard got at least part of what it asked for. The fund, run by Jeffrey Smith, declined to comment on Yahoo’s announcement Wednesday.

Yahoo suggested it wasn’t entirely swayed by Starboard.

“I would say shareholder input was important and a factor,” Chairman Maynard Webb said in an interview. “But we have so much more insight from our advisers” who have intimate knowledge of the complexities of the business.

Market Evaluation

The essential Yahoo properties could attract a valuation of $3.5 billion or more, depending on the buyer, according to CRT Capital Group analyst Robert Coolbrith. Others have said it could be worth less than $2 billion.

"The challenge with the reverse spin is that the operating company -- warts and all -- will be on display for the market to evaluate,” said Paul Sweeney, a Bloomberg Intelligence analyst.

Telecommunications giant Verizon Communications Inc. would explore a possible acquisition of the Web assets, 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.

“Similar to AOL, Yahoo may be better off in the hands of a strategic or financial buyer,” Sweeney said. “The reverse spin structure may facilitate this move.”

‘Tremendously Undervalued’

Yahoo’s 35.5 percent stake in Yahoo Japan could also draw attention from SoftBank Group Corp., the largest investor in Japan’s most profitable website. SoftBank CEO Masayoshi Son would likely want to control the outcome of Yahoo’s $8.6 billion stake in Yahoo Japan, to ensure it doesn’t fall into the hands of an adversary, as it accounts for almost a quarter of SoftBank’s operating profits.

For its part, Yahoo insists it’s not putting itself on the block -- for now.

"We have made no determination to sell the company or any part of it,” Chairman Webb said in an interview."We believe that we are tremendously undervalued, and we think the best path to unlocking that value is by separating the Alibaba assets from our operating businesses and also turning around the performance in our operating business."

Webb told CNBC that the board has a “fiduciary obligation to engage with any legal person that comes forward with a good offer,” but that Yahoo is not “proactively trying to do any of that.”

The reverse spin to repackage the remaining assets and liabilities is likely to require additional steps, including approvals and new financial statements, the company said in the statement. A transaction of this kind can take a year or more to complete, Yahoo said.

Mayer’s Struggle

The backflip is a defeat for Mayer, who was brought aboard in 2012 to revitalize the once-dominant Internet brand that has struggled to find a strategy to return the company to growth.

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.

Separately, Yahoo said Max Levchin resigned from the board, and will instead focus on his responsibilities as the CEO of payments company Affirm Inc. In a regulatory filing, the company said the change is not due to any disagreement with on any matter related to Yahoo’s operations, policies or practices. The Web portal said the size of the board will be eight directors after Levchin’s resignation.

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