Yahoo! to keep Alibaba stakes

Yahoo! will abandon plans to spin off its $31 billion stake in Alibaba, a Chinese e-commerce company, people briefed on the matter said on Tuesday.

Instead, Yahoo! will consider other options, including possibly selling its core Internet operations, which would leave its Alibaba stake as its primary asset. The company's stake in Yahoo! Japan may also be spun off, the people said. An announcement may come as soon as Wednesday.

The decision, reached after extensive deliberations by the company's board over the past week, is a repudiation of the strategy laid out by Marissa Mayer, Yahoo!'s chief executive, who was hired in 2012 to turn around the struggling Internet company. Mayer had planned to spin off Yahoo!'s 15 per cent stake in Alibaba, bundled with a small-business services unit, into a new company called Aabaco.

She then planned to focus her attention on the company's core business, which is the selling of advertising that gets shown to the roughly one billion users of its apps and websites.

But some investors, led by the Starboard Value hedge fund, had argued that there was too much risk that the Internal Revenue Service would seek capital gains taxes of $10 billion or more from the Alibaba transaction. That risk increased after the IRS refused to affirm in advance that the spin-off would be tax-free.

The decision to table the spin-off was first reported by CNBC. The report sent Yahoo! shares up about three per cent in after-hours trading.

"We think it's a positive defining moment for the company," said Robert Peck, an analyst with SunTrust Robinson Humphrey, who had published a detailed argument against the spin-off before the board met. "The board is honouring its fiduciary responsibility and listening to shareholders."

Yahoo! and Starboard both declined to comment. The Alibaba spin-off had been in the works for nearly a year and was the centrepiece of Mayer's plan to deliver big returns to Yahoo!'s shareholders. Now, the company will need to devise a new strategy.

Starboard had urged the board to sell Yahoo!'s Internet operations. Those could attract interest from strategic buyers, such as telecommunications and cable companies, as well as private equity companies seeking to cut costs while tapping the company's remaining revenue stream.Verizon Communications, which bought the Yahoo! rival AOL this year, would consider buying Yahoo! if it were for sale, Lowell McAdam, Verizon's chief executive, said at a technology conference Tuesday.

Another option for Yahoo! is to spin off its Internet operations, leaving behind its investments in Alibaba and Yahoo! Japan in the original company.

It could also sell or spin off its 35 per cent stake in Yahoo! Japan, worth about $8.5 billion, or engineer some kind of swap with SoftBank, the Japanese company that is Yahoo! Japan's largest shareholder.

Mayer could simply leave the investments untouched and focus on her plans for slimming down and focusing the Internet businesses. A less likely alternative would be to put the whole company up for sale.

"I'd expect them quite honestly to look at all of these scenarios," Peck said.

Yahoo!, which was a leading gateway to the Internet at the dawn of the World Wide Web, has been in decline for a decade. Although its email, sports, news and search sites and apps remain popular, the company has struggled to innovate and attract new users, who have turned to younger, more nimble properties like Facebook, Google, Instagram and Twitter.

Yahoo!! makes most of its money from advertising, but the display ads that it long relied on have fallen in price, and it has had difficulty coming up with compelling options in two areas where marketers are particularly focused right now - video ads and "native" advertising, or ads that look similar to regular news content.

Ms. Mayer, a former Google executive who inspired hopes of a Yahoo!! revival when she arrived in mid-2012, has largely failed to deliver on those expectations. The company's revenue is at the same level as when she arrived, and many of her initiatives, including original video programming, a series of digital magazines, and a silent video messaging app called Livetext, have yielded disappointing results.

Many on Wall Street have lost patience and say change is needed. In recent months, morale has declined, with a steady exodus of senior executives and rank-and-file employees.

Ms. Mayer is expecting the birth of twins this month. She has said she plans to take only a short maternity leave before returning to the job full time.

Analysts say Yahoo!!'s core business would fetch between $3 billion and $8 billion if it was sold. The company had four permanent chief executives from 2007 to 2012, all of whom failed to devise a viable turnaround strategy.

©2015 The New York Times News Service