It appears this is the beginning of the end of Yahoo as we know it. Yahoo said yesterday that it will pull the plug on the plan it announced in January to spin off its holdings in Chinese e-commerce giant Alibaba Group, valued at about $32 billion. Rather, the company will spin off its Web business into a separate, publicly traded company.
Yahoo's board of directors made the decision, "after careful review and consideration of how to best drive long-term value for shareholders.” Maynard Webb, chairman of the board, explained the board’s reasoning: Although board members believe the previously announced spin off would be tax free to Yahoo and its shareholders, they are considering the bigger picture at Yahoo. Given the developments since the original spin off plan, it just doesn’t make sense anymore.
Splitting Yahoo in Two
“Among other factors, we were concerned about the market's perception of tax risk, which would have impaired the value of Aabaco stock until resolved,” Webb said, in a statement. “Informed by our intimate familiarity with Yahoo's unique circumstances, the board remains committed to accomplishing the significant business purposes and shareholder benefits that can be realized by separating the Alibaba stake from the rest of Yahoo. To achieve this, we will now focus our efforts on the reverse spin off plan."
With this decided, the board is now moving to determine the best alternative transaction structures to separate the Alibaba stake. The biggest challenge is to find a way to reverse the previously announced spin transaction -- and that’s just the beginning of getting out of the weeds.
A true reverse spin off would see Yahoo's assets and liabilities -- except the Alibaba stake -- transferred to a newly formed company. The stock of the new company would be distributed pro rata, i.e., proportionate allocations, to Yahoo shareholders. The end result would be two separate, publicly traded companies. Of course, all of this is subject to third-party consents, audited financial statements, shareholder approval and SEC filings and clearance, which could take at least a year to execute.
"In addition to our efforts to increase value and diminish uncertainty for investors, the ultimate separation of our Alibaba stake will be important to our continued business transformation," said Marissa Mayer, CEO of Yahoo, in the statement. "In 2016, we will tighten our focus and prioritize investments to drive profitability and long-term growth. A separation from our Alibaba stake, via the reverse spin, will provide more transparency into the value of Yahoo's business."
Seeing the Bigger Picture
We caught up with Greg Sterling, vice president of strategy and insight at the Local Search Association, to get his thoughts on Yahoo’s announcement. He told us he’s not surprised at the latest development.
“The move was necessitated by uncertainty over the tax implications of the Alibaba spinoff. The new decision, to spin Yahoo's main business into a new company, will still achieve the separation of the Alibaba stake but not in the originally intended way,” Sterling said. “In the bigger picture, there's a growing sense now that part or all of Yahoo will be sold as institutional shareholders put pressure on the board for some sort of transaction that will generate better returns for them.”
Image credit: Yahoo Flickr.