By Douglas MacMillan And Lauren Pollock
Yahoo Inc. unveiled a plan to spin off tax-free its nearly $40
billion worth of holdings in Alibaba Group Holding Ltd., a move
that should buy Chief Executive Marissa Mayer more time with
shareholders despite continued declines in the Internet portal's
core advertising business.
Investors have been eager to hear Yahoo's plans to extract value
from its Asian assets, which represent the vast majority of its $47
billion market value, while avoiding a tax bill of billions of
dollars.
After the spinoff, expected in the fourth quarter of this year,
Yahoo will continue to operate its core business and hold its 35.5%
interest in Yahoo Japan. The new company will own all of Yahoo's
remaining shares of Alibaba. It will assume no debt in the deal,
and Yahoo will retain its cash.
Investors applauded the news, sending Yahoo shares up more than
10% in late trading. The plan saves Yahoo from paying billions of
dollars in taxes and erases fears that Ms. Mayer would squander
some or all of the value of the Alibaba stake on large
acquisitions.
But the CEO failed to address all of the concerns raised last
year by activist investor Starboard Value LP, which also called for
cost-cutting measures and a potential tie-up with AOL Inc. That
leaves open the possibility of a potential proxy fight.
Starboard also called for Yahoo to spin off its Yahoo Japan
stake, currently valued at about $7.2 billion. On a conference call
with analysts, Yahoo financial chief Ken Goldman said Yahoo is open
to exploring opportunities for Yahoo Japan but stopped short of any
providing more details.
A representative from Starboard didn't immediately offer comment
on whether it is satisfied with the split--which is expected to
close after the expiration of the one-year lockup agreement on
Alibaba's IPO. Yahoo sold shares in Alibaba's initial public
offering in September but still owned a 15% stake of the Chinese
e-commerce giant.
The spin-off plan gives Ms. Mayer "more ammunition in her battle
against Starboard in terms of trying to win points with investors,"
said Eric Jackson, founder of Ironfire Capital LLC, an investor in
Yahoo. "I don't think they will go away completely."
A representative from Starboard declined to comment shortly
after the announcement.
A spin-off will put more investor focus on Yahoo's core ad
business, which continues to shrink. Yahoo reported on Tuesday that
revenue in the fourth quarter, minus commissions paid to search
partners, declined 2% to $1.18 billion, falling short of analyst
expectations and reversing the small gain in the third quarter. The
company has been hampered by weakness in revenue from display ads,
which have fallen eight of the past nine quarters.
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 23% to $254
million in the fourth quarter. That represents about 20% of Yahoo's
total revenue.
In all, Yahoo's 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,
dropped 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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