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Wall Street Gets What It Wanted From Marissa Mayer: Here's the Yahoo Plan to Spin Off Rest of Alibaba Stake

Can you say tax free?

Yahoo said it would spin off the rest of its 15 percent stake in China’s Alibaba Group today, which will result in a tax-free distribution to its investors. After declining yesterday by 3 percent, shares of the Silicon Valley Internet giant rose on the news, up nearly more than 7.5 percent in after-hours trading.

Yahoo said the transaction will result in “two independent public companies”:

SpinCo: All of Yahoo’s remaining shares in Alibaba + a legacy, ancillary, operating business of Yahoo (“Active Trade or Business”, or “ATB”)

Yahoo: Yahoo’s operating business + Yahoo’s 35.5% equity interest in Yahoo Japan.

In its deck about the much-anticipated announcement, the company said: “Yahoo believes this transaction will achieve the most advantageous return of capital to our shareholders with the absolute highest probability of success.”

It’s not like Yahoo had much of a choice. Shareholders have been pressing CEO Marissa Mayer to do this, since the company had paid a huge tax bill on its previous sale of Alibaba shares, some $3 billion. The move leaves Mayer with less money to spend on acquisitions — although she still has over $10 billion in cash and a strong stock to work with.

That said, Yahoo is a weak company still, despite her tireless turnaround efforts. As expected, the company slightly missed its revenue estimates in the fourth quarter, posting revenue of $1.18 billion and earnings of 30 cents. Wall Street was expecting Yahoo to earn 29 cents per share with $1.19 billion in revenue. That compares to $1.2 billion a year ago, due to declines in display advertising.

More intriguingly, it leaves a decidedly smaller company for Mayer to run — with a market cap of about $7 billion — and one without its rich Chinese assets to soften the blow of its persistent revenue misses. The possibility of a sale of Yahoo to a bigger entity or a private equity player now becomes very present.

In other words, this is the last stop on the Alibaba party train that Mayer has been riding since she arrived at Yahoo two and a half years ago.

Interestingly, SpinCo will be classified as an investment company under the Investment Act of 1940, which means that Yahoo has been working with regulators on easing the transaction.

Because of a lockup on the sale of the Alibaba shares, as well as the need for normal government and board approvals, Yahoo said that the spinoff would not take place until the fourth quarter of this year.

Here is Yahoo’s short deck on the plan, which Mayer talked about later in call with Wall Street analysts:


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