Yahoo’s new plan: spin off Internet business

Associated Press

SAN FRANCISCO

Internet pioneer Yahoo, under pressure from unhappy shareholders and desperate to avoid a huge investment-related tax bill, will break itself apart – just not in the way it previously had planned.

The company will now aim to spin off its struggling Internet business – essentially, everything associated with the Yahoo brand name – into a new company. Yahoo itself would then become little more than a holding company for its $32 billion stake in Chinese e-commerce giant Alibaba.

For most of the past year, Yahoo had planned instead to spin off the Alibaba stake into a separate holding company called Aabaco. That corporate maneuver was designed to sidestep more than $10 billion in taxes Yahoo might otherwise owe. But the IRS jeopardized that plan by refusing to guarantee a tax exemption.

The about-face could mean big changes for hundreds of millions of users who rely on Yahoo websites, services such as email and other mobile applications. CEO Marissa Mayer plans to outline a cost-cutting reorganization late next month; many analysts speculate that Yahoo may simply sell off that business if the latest overhaul doesn’t bear fruit quickly.

The uncertainty and reshuffling threaten more distractions at a time when Yahoo is already struggling in digital advertising against rivals such as Google and Facebook. It also may raise more doubts about whether Mayer will be able to turn around Yahoo, even though company Chairman Maynard Webb said last week that the board of directors remains in her corner after 31/2 years on the job.

“The bottom line is the saga continues,” Macquarie Securities analyst Ben Schachter wrote in a note titled “The Never-Ending Story.”

Yahoo’s new spinoff plan could be even more complicated than the original Aabaco spinoff. It may take more than a year before Yahoo shareholders get stock in a newly formed company that has yet to be named.

“This means they have squandered an entire year, and now it’s going to take another year while the core business continues to get weaker,” BGC Financial analyst Colin Gillis said.

With Yahoo hanging in limbo, prospective bidders could emerge for the company’s Internet operations, which Wall Street has been valuing at next to nothing. Analysts believe Yahoo’s websites, mobile applications, ad services and well-known brand eventually could be worth $3 billion to $5 billion. Suitors might include AT&T Inc., Verizon Communications, Comcast Corp., IAC/InterActiveCorp and private equity firms that specialize in buying troubled companies.

Webb, though, emphasized there are no plans to sell Yahoo’s Internet business, which he called “tremendously undervalued” in a recent conference call. The best path forward, Webb said, involves “separating the Alibaba assets from our operating businesses and also turning around the performance in our operating business.”

Those remarks seemed to disappoint investors hoping that Yahoo’s latest change in course might be a precursor to a sale. Yahoo’s stock shed 45 cents to close at $34.40. The shares have fallen by 32 percent so far this year.

Yahoo’s board met recently to review Mayer’s stalled turnaround attempts, as well as whether to move ahead with the previously planned Alibaba spinoff. Although the board unanimously voted in favor of dropping the spinoff, it emerged from last week’s meeting with one less director. The company disclosed that Paypal co-founder Max Levchin, a director recruited by Mayer, is resigning from the board to concentrate on running his latest financial services startup.

Mayer said she believes Yahoo’s Internet business is in significantly better shape than when she arrived, largely because it is pulling in more traffic and advertising in the increasingly important smartphone and tablet market. Even so, Yahoo’s net revenue declined by 8 percent from the prior year in the third quarter, and an even steeper decline is forecast for the current quarter ending in December.

When Yahoo announces those fourth-quarter results next month, Mayer also plans to unveil a shake-up that is supposed to jettison the company’s least profitable products and likely will lead to layoffs.