By Douglas MacMillan And David Benoit
Marissa Mayer on Tuesday is expected to unveil her plan for
Yahoo Inc.'s valuable Asian assets, an announcement that could
determine whether the embattled chief executive buys herself more
time with shareholders or invites a bitter proxy battle that could
threaten her job.
The Internet company plans to update shareholders on its
remaining stakes in Alibaba Group Holding Ltd. and Yahoo Japan when
it announces fourth-quarter earnings. After selling shares in
Alibaba's initial public offering, Yahoo still owns 15% of the
Chinese e-commerce giant and 35.5% of Yahoo Japan, which together
make up the vast majority of Yahoo's current market capitalization
of $46.4 billion.
Investors are hoping Yahoo has come up with a scheme to extract
value from those assets while avoiding a tax bill of billions of
dollars. Finance chief Ken Goldman told investors last October he's
"optimistic" the company could avoid paying a full tax rate of 35%
or more, as it has with all previous sales of Alibaba shares.
Activist investor Starboard Value LP has pressured Yahoo to
minimize those taxes, calling for the company to essentially break
itself into two distinct parts, one for its core business of
Internet properties and the other for its holdings in Alibaba and
Yahoo Japan. The investor advised spinning out that core business,
leaving the parent company just holding the Asian assets.
This would leave Alibaba and others with the ability to acquire
the Asian assets with a smaller tax bill than if Yahoo sold the
assets out of the parent company. Such a split could include
several other wrinkles, including the possibility that the spun-off
core business could merge with AOL Corp., as Starboard has
suggested. RBC Capital Markets analyst Mark Mahaney estimates
Yahoo's core business is worth about $6.4 billion, compared with
AOL's $3.8 billion current market value.
Jacqueline Reses, Yahoo's merger chief, ruled out the
possibility of an AOL acquisition in comments she made at a
technology conference last year. When asked if she thought AOL
would be acquired in the next two years, she said, "Not by us."
Starboard said it's opposed to another option called a cash-rich
split-off. In that transaction, Alibaba would create an entity that
is worth roughly the same amount as Yahoo's stake in Alibaba. At
least one-third of the value of that entity would need to be
comprised of operating businesses and the remaining could be
straight cash. This would allow Yahoo to trade the stake for mostly
cash.
While a cash-rich split-off would also save significantly on the
taxes Yahoo would pay if it just sold the shares back to Alibaba,
Starboard says it would be less efficient than the spin
options.
A lower tax bill would have a "material" impact on the value of
Yahoo's business, Mr. Mahaney said. "For every 5 percentage points
they can reduce [from the tax bill], it adds about $2 billion in
value to Yahoo's market cap, or about $2 a share," Mr. Mahaney
said.
"There are many people who think they can take that tax rate and
cut it in half," he added.
Placating investors could buy Ms. Mayer more time to turn around
the company's struggling display-ad business, which has declined in
seven of the past eight consecutive quarters. Analysts expect total
revenue in the fourth quarter to decline to $1.19 billion,
excluding commissions paid to search partners, according to a mean
of estimates by Thomson Reuters.
The CEO told employees in a memo earlier this month she aims to
grow display-ad revenue in 2015, a goal she's likely to echo on a
call with analysts Tuesday.
While revenue from desktop display ads continues to shrink,
Yahoo has attempted to offset those declines by investing in newer
ad businesses like mobile, social and video. The company has said
it predicts Tumblr, the blogging platform it acquired for $1.1
billion in 2013, to contribute $100 million in sales this year.
Ms. Mayer attempted to accelerate Yahoo's efforts in mobile ads
this year by reorganizing management and promoting Prashant
Fuloria, a veteran Internet product manager who joined Yahoo last
year when it bought his former employer, mobile-ad startup Flurry,
to oversee all ad products at the company.
Yahoo is poised to surpass Twitter Inc. to become the
third-largest mobile ad company in 2015, according to eMarketer
Inc.
But if Ms. Mayer fails to deliver a tax deal that pleases
investors, she could find these efforts complicated by a
distracting proxy battle. Starboard founder Jeffrey Smith, who
succeeded in replacing the entire board of directors at Darden
Restaurants after a proxy fight last year, has threatened to mount
a challenge to Ms. Mayer.
Ms. Mayer's lack of progress in turning around Yahoo could make
her susceptible in such a fight, said Brian Wieser, an analyst at
Pivotal Research Inc.
"The current management team really doesn't have much to stand
on in terms of pointing to recent past successes," Mr. Wieser said.
"I think most investors will be supportive of what Starboard is
trying to do here."
Starboard hasn't disclosed the exact size of its Yahoo stake,
but said it is a "significant" holder.
Write to Douglas MacMillan at douglas.macmillan@wsj.com and
David Benoit at david.benoit@wsj.com
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