BUSINESS

Yahoo CEO spinning off 15 per cent stake in Alibaba to avoid $16 billion in future taxes

01/27/2015 04:31 EST | Updated 03/29/2015 05:59 EDT
SAN FRANCISCO - Yahoo CEO Marissa Mayer is spinning off the company's $39 billion stake in China's Alibaba Group Holding in a move that wards off a potential shareholder rebellion.

The highly anticipated decision announced Tuesday will enable Yahoo to avoid paying billions of dollars in future taxes while intensifying the pressure on Mayer to prove she can rejuvenate one of the Internet's oldest and best-known companies.

A newly formed entity called SpinCo will inherit ownership of Yahoo's 384 million Alibaba shares when the tax-free spinoff is completed toward the end of this year.

Existing Yahoo shareholders will receive stock in SpinCo, which will be designated as a registered investment company. The breakup is being set up so SpinCo's gains from the sale of Alibaba stock will be taxed as a lower rate than Yahoo Inc. would have paid had it held on to the stake.

Yahoo stockholders cheered Mayer's plan as the company's shares gained $3.44, or more than 7 per cent, to $51.43 in extended trading.

The spinoff overshadowed Yahoo's results for the final three months of last year. The fourth-quarter numbers showed Yahoo is still struggling to grow, even as more advertising shifts to the Internet and mobile devices.

Yahoo earned $166 million, or 17 cents per share, a 52 per cent drop from the same period in the previous year. If not for certain charges, Yahoo said it would have earned 30 cents per share — a penny above the average estimate of analysts surveyed by FactSet.

The company's revenue dipped 1 per cent to $1.25 billion. After subtracting ad commissions, Yahoo's revenue totalled $1.18 billion, another small decline from the previous year and slightly below analysts' projections.

It marks the eighth time in Mayer's 10 quarters as Yahoo's CEO that the company's revenue has declined from the previous year.

Yahoo Inc. invested just $1 billion in Alibaba nearly a decade ago, a bargain that slapped the company with massive tax bills as it whittled its stake during the past three years. Without the spinoff, Mayer estimated that Yahoo's tax bills on its Alibaba stake would have been about $16 billion, based on Alibaba's current market value.

Investments in Alibaba, China's largest e-commerce company, and Yahoo Japan are the main reason Yahoo's stock has more than tripled since Mayer defected from Google to become Yahoo's CEO two-and-half years ago.

Yahoo, which is based in Sunnyvale, California, is retaining its nearly 36 per cent stake in Yahoo Japan. The stake is currently worth nearly $7 billion, BGC Financial analyst Colin Gillis estimated.

"This is ideal for shareholders and shows that (Mayer) is aligning herself with shareholder interests, at least for now," Gillis said.

The spinoff is subject to approvals from the Internal Revenue Service and the Securities and Exchange Commission. Yahoo plans to jettison the Alibaba stake after the September expiration of a one-year lock-up agreement requiring Yahoo to hold on to the shares.

The Alibaba investment is worth far more than Yahoo's own online services, which have been struggling to generate more revenue for the past six years while rivals Google Inc. and Facebook Inc. grabbed a bigger piece of digital marketing budgets.

Yahoo sold nearly $9.5 billion worth of stock in Alibaba's initial public offering, triggering more than $3 billion in taxes.

The handling of Yahoo's Alibaba stake is so important to shareholders that one activist investor, hedge fudge manager Jeffrey Smith of Starboard Value, had threatened to spearhead an attempt to oust Mayer if she didn't adopt a strategy that minimizes taxes.

Smith also has been pressuring Mayer to commit to returning most of any future Alibaba windfalls to shareholders instead of spending the money to buy other companies — unless she embraces his call for Yahoo to merge with rival AOL Inc.

Starboard Value did not immediately respond to a request for comment.

Mayer assured analysts in a Tuesday presentation that she will take a "very disciplined" approach to any potential acquisitions. Yahoo still has about $10 billion in cash, providing plenty of firepower to finance more deals. Mayer already has spent about $1.7 billion on more than three dozen acquisitions during her reign.