By Douglas MacMillan And Lauren Pollock 

Yahoo Inc. unveiled plans for a tax-free spinoff of its remaining stake in Chinese e-commerce giant Alibaba Group Holding Ltd., heeding calls from some shareholders and activist Starboard Value LP.

Investors have been eager to hear Yahoo's plans to extract value from its Asian assets, which represent the vast majority of its market value, while avoiding a tax bill of billions of dollars.

Shares rose nearly 8% in after-hours trading as investors cheered the tax-free nature of the deal. Some, however, had hoped the new company would include Yahoo's stake in its Japan operations as well.

Instead, the new company will own all of Yahoo's remaining shares of Alibaba, which are valued at almost $40 billion, and will assume no debt in the deal.

Yahoo, meanwhile, will hold on to its core business and its 35.5% interest in Yahoo Japan, which is worth about $7 billion.

The company sold shares in Alibaba's initial public offering but still owned a 15% stake of the Chinese e-commerce giant. Together, the Alibaba and Yahoo Japan stakes make up the vast majority of Yahoo's current market capitalization of about $47 billion.

"We have actively engaged experts in tax efficient structures over the past two years and have considered a variety of alternatives," Chief Financial Officer Ken Goldman said.

The deal is expected to close in the fourth quarter after the expiration of the one-year lockup agreement on Alibaba's IPO.

The spinoff plans came as Yahoo also reported lower earnings and revenue for its fourth quarter.

Tuesday's plans could help determine whether embattled Chief Executive Marissa Mayer buys herself more time with shareholders or invites a bitter proxy battle that could threaten her job.

Starboard had 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.

A representative from Starboard didn't immediately offer comment.

Placating investors with the spinoff could buy Ms. Mayer more time to turn around the company's struggling display-ad business.

The company reported Tuesday that revenue from display ads, excluding traffic costs, dropped 5% to $464 million in the fourth quarter.

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, which reported revenue from mobile for the first time in the previous quarter, said mobile revenue grew to $254 million in the fourth quarter.

In all, Yahoo said its profit slipped to $166 million, or 17 cents a share, from $348 million, or 33 cents a share, a year earlier. Excluding one-time items, the company's earnings fell to 30 cents a share, from 46 cents.

Revenue, minus commission paid to partners for Web traffic, fell to $1.18 billion.

Analysts polled by Thomson Reuters predicted per-share earnings of 29 cents on $1.19 billion in revenue.

Search revenue excluding traffic costs was flat at $462 million. Paid clicks increased 10%, and price per click rose 7%.

Write to Douglas MacMillan at douglas.macmillan@wsj.com and Lauren Pollock at lauren.pollock@wsj.com

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