Coverage: Yahoo to spin off its core business

The future for Internet giant Yahoo just became a bit more hazy with the company confirming a spin off of its core business.

For months, the company planned a spin off of its multi-billion dollar stake in Alibaba, but after set backs from the Internal Revenue Service and investor uncertainty, Yahoo changed its pace.

Vindu Goel of The New York Times had the day’s news:

Yahoo said on Wednesday that it had dropped a plan to spin off its $31 billion stake in Alibaba, the Chinese e-commerce company. Instead, the company will spin off all of its other assets, including its stake in Yahoo Japan, into a new company.

The decision not to sell the Alibaba stake, which was reported on Tuesday, was driven by “the market’s perception of tax risk” associated with the Alibaba plan, Yahoo said in a statement on Wednesday morning.

“The board remains committed to accomplishing the significant business purposes and shareholder benefits that can be realized by separating the Alibaba stake from the rest of Yahoo,” Maynard Webb, the chairman of Yahoo’s board, said in the statement. “To achieve this, we will now focus our efforts on the reverse spinoff plan.”

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Yahoo shareholders would end up with stock in both companies. The company said the new plan might take a year or more to conclude. Yahoo will provide more details during a conference call with investors at 9 a.m. E.S.T., before the stock market opens.

Yahoo shares, which closed Tuesday at $34.85, rose more than 2 percent in premarket trading.

Douglas Macmillan and George Stahl of The Wall Street Journal explained how the company’s board came to this decision:

Spinning off the core business would likely take several more months to complete because of its complexity, but it could save Yahoo billions of dollars in taxes, analysts say. That is because Yahoo’s core business is valued much lower than the 15% Alibaba stake.

Yahoo’s core business is shrinking, but it still represents some of the most visited services on the Web. Its properties, including Yahoo Mail and Yahoo News, are collectively the third-most visited Internet sites in the U.S., with 210 million visitors in October, according to comScore. Yahoo only trails Google Inc. and Facebook Inc.

The change in plans follows a Yahoo board meeting last week and pressure from activist investor Starboard Value LP, which said in a letter last month that the Alibaba spinoff carried too much risk and that the company should find a buyer for its Internet business.

Yahoo Chairman Maynard Webb said in prepared remarks Wednesday that the company believes the previous plan to spin off the Alibaba stake would have been tax free, but “we were concerned about the market’s perception of tax risk, which would have impaired the value” of the spinoff’s stock.

In September, Yahoo disclosed the Internal Revenue Service denied its request for a favorable ruling of the Alibaba plan. Yahoo said it would move forward with the proposed spinoff anyway, running the risk that the IRS could challenge the spinoff in a future audit and potentially putting shareholders on the hook for billions of dollars in taxes.

Starboard said its position on the Alibaba spinoff changed following the federal government’s decision not to rule on the tax implications.

Kara Swisher of Re/code described how the company’s fate rests not in its products, but its taxes:

And today, CNBC is reporting that the directors of the company agree with Starboard and will stop the spinoff and perhaps consider other options. It’s not clear that a sale is the aim, or if they plan to give Mayer more time for her turnaround, but two things are crystal clear if the spinoff is abandoned.

This is a board that is making its decisions based on taxes — which makes sense given the billions at stake here — and with zero confidence that there are any really innovative things to be done with Yahoo to turn it around.

Maybe not, but it is entirely the board members’ fault for making themselves prone to financial machinations more than anything else. And Mayer’s for blowing what was a golden opportunity when she arrived.

They deserve it, because, most of all, this is a board that must be very scared that it would lose a proxy fight that Starboard and its voluble head, Jeff Smith, was preparing to wage against it. Smith has gained a lot of credibility since he first went after AOL, and the prospect of him getting board seats at Yahoo perhaps seemed inevitable to directors, who surely did not want to be subject to an ugly public war about their performance.

Thus, Yahoo’s board is trading tax savings for safety — except it’s not safe at all.

As I noted in a podcast I did last week about Yahoo, no spinoff puts it into play in a very significant way, even if the board does not say so. And none of it has anything to do with creating great products for consumers, which was the only thing that would have saved Yahoo in the first place.

Score one for the accountants.

Chris Barylick of San Jose Mercury News wrote about how this decision could impact CEO Marissa Mayer:

Yahoo CEO Marissa Mayer is not in an enviable position these days.

The 40-year-old tech executive was brought in to effectively clean house and restore Yahoo to its late-’90s tech titan glory, but efforts to turn things around proved tougher than expected for this former Google star. And now some are questioning her leadership, having run out of patience for a spurt of innovation that could make the company a competitive force once again.

“There was no way for her to succeed, quite simply because it’s a product that’s going to eventually be end-of-lived,” said Laura Black, a visiting professor of information technology at Marymount University. “I mean, maybe five years ago, we had people who were using Yahoo Groups like crazy, but Facebook has really replaced that, so I think there’s very little she could do to turn such a large company around.”

News reports Tuesday said Yahoo is scrapping its anticipated sale of its 20 percent stake in Alibaba Group, the Chinese Web portal, which could have brought several billion dollars back to the company. Instead, it may be considering a sale of its Web businesses, according to a CNBC report that cited unnamed sources.

Regardless of the board’s next move, Mayer’s role is still in question, given investor pressure and revenue worries.