Marissa Mayer took over as Yahoo CEO in 2012 and has yet to turn the company around. Granted, Yahoo shares have more than doubled since the start of 2012, but it’s merely kept pace with the Nasdaq Composite Index.
Meanwhile, Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) are up more than 140%. But the key driver for the growth in Yahoo’s stock price is the large stake it has in China’s e-commerce giantAlibaba Group (NASDAQ:BABA).
Nonetheless, Mayer did manage to come up with a grand plan to unlock value for shareholders. This includes spinning off that very valuable stake in Alibaba. With that news broke about the spinoff, the stock traded over $50 a share for the first time since the tech bubble.
However, the euphoria was short-lived. Yahoo faced huge tax issues over the spinoff of Alibaba. Yahoo shares are now back down in the low $30s and the company has gone back to the drawing board.
Now, it’s doing a “180″ when it comes to unlocking value for its shareholders.
A New Strategy for Yahoo
The new answer: spin off the core business instead.
The key is that the new proposed spinoff won’t prompt such a large tax expense. The value of Yahoo’s core business has risen far less than the Alibaba stake. Thus, the tax liability will be much less. A $10 billion tax bill was expected in the Alibaba spinoff. However a spinoff of the Yahoo core business might generate a tax bill of around $2 billion – and that assumes Yahoo Japan is spun off with the core business.
Mayer Under Pressure
The more likely option, as opposed to a spinoff of the core business, is a sale of that business. Shareholders aren’t interested in waiting around and taking the risk of having the spinoff idea crushed again.
This includes one of its top shareholders, activist investor Starboard Value, which threatened a proxy fight to get board representation if Yahoo moved ahead with an Alibaba spinoff.
However, the hedge fund likely won’t be interested in sticking around for more spinoff shenanigans at Yahoo. The deadline to file proxy materials is March. Yahoo has said that a spinoff will take at least a year, so it’s likely there is pressure to get a spinoff done within the next few months.
If Yahoo manages to sell its core business, it’ll leave Alibaba, and maybe Yahoo Japan, as its primary assets. Starboard is no stranger to pushing Yahoo to sell the core business. Yahoo refused to do so when Starboard first got involved with the company, deciding to pursue the Alibaba spinoff. Will it make the same mistake twice?
It looks like Starboard’s plan of merging Yahoo’s core business and AOL might have been the best option for the company. As it turns out, one of the interested buyers in Yahoo’s business is Verizon (NYSE: VZ). Verizon bought AOL earlier this year and the Verizon CEO has said that if Yahoo is for sale, they’d be interested.
Then there are other buyers, such as private equity companies, which could cut costs and milk the remaining cash flow from Yahoo’s ad business. Time is of the essence, though, because Yahoo’s core business is in decline. It isn’t growing and advertisers are choosing AOL for ads and video services. There are still a lot of uncertainties with Yahoo’s spinoff or a potential buyout, including what someone would pay for Yahoo’s core business given the stagnant growth.
Overhangs That Remain
The first major overhang is that even with a spinoff or sale of the core business, the company is still left with a large stake in Alibaba, which could be unappealing to shareholders. It’s trading at over 30 times earnings and there have been questions about its Chinese operations.
Then there’s the fact that Yahoo will still be faced with tax issues – granted, not as great as those in an Alibaba spinoff. In the end, Yahoo shares presents too much uncertainty to make the tech company investable.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.