Why Yahoo decided not to spin off Alibaba

On Tuesday, Yahoo Inc announced that it would shelve plans to spin off the company’s stake in Chinese e-commerce giant Alibaba Group Holdings amidst concern by its shareholders that the government in the USA might claim that taxes are due on the deal costing Yahoo billions of dollars.

Along with the Alibaba stake, the new company would also hold Yahoo’s 35% stake in Yahoo Japan as well as its Internet business.

Mayer promised investors that Yahoo! will “prioritise investments to drive profitability and long-term growth”.

Yahoo originally planned to break its stake of Alibaba – worth more than $30 billion – into a new holding company to ensure the lucrative investment would not overvalue Yahoo’s stock. Its services include display and search ads on Yahoo’s email service and news sites.

So at this point the future of Yahoo and Marissa Mayer is up in the air.

Mayer, who said she plans to stay on with the company, has had a troubled three-year tenure as chief executive marked by a series of acquisitions that failed to bolster the company’s core business, including the 2013 purchase of Tumblr for $1.1 billion.

Yahoo had earlier considered spinning off Alibaba and keeping the rest, but was “concerned about the market’s perception of task risk”, Yahoo Chairman Maynard Webb said in the Yahoo statement.

Yahoo is now pursuing a different course that could make it easier to eventually sell its Internet operations, the business that now generates virtually all of Yahoo’s revenue. Instead, the company will spin off other assets of its core businesses. The move, which is subject to regulatory approval, could take more than a year to complete, the online business said. Shareholders would also forgo paying a second dividend distribution tax of about 15 percent on those shares.

Coolbrith argues that Yahoo should be worth at least $43 per share right now and believes that investors should be applying tax discounts for the Yahoo Japan stake and Core Yahoo instead of the Albibaba stake. But it’s going to involve more waiting, and from what Mayer and Webb said on TV this morning, more of the same. We want to help her return this company to an iconic place where it belongs.

The creation of a new entity would take a year or more will likely take Mayer’s focus away from turning around the Internet business.

Yahoo’s share price was up by 2% after the news, when market closed on Tuesday.