Yahoo’s $40 Billion Alibaba Spin-off Is Win for Mayer

AP Photo/Michel Euler
AP Photo/Michel Euler
Newport Beach, CA

You have to give Yahoo Inc. Chief Executive Marissa Mayer kudos for unveiling the spin-off of a 384-million-share stake in Alibaba Group Holding Ltd into a separate, publicly-traded company named SpinCo  on the same day and just before Apple Inc. announced  its blockbuster quarterly earnings of $3.06 per share on revenue of $74.6 billion earnings.

Mayer’s announcement that the investment in the in Chinese e-commerce giant created a $50 billion profit for Yahoo shareholders sent Yahoo’s stock up almost 7% higher than the close on January 27.

Yahoo wisely held its shareholder call an hour before Apple’s call. With the Dow Jones Industrial Average falling 291 points, analysts cheered the company’s spin-off–which will save billions of dollars in taxes–and earnings that were surprisingly better than the forecast.

Mayer reported fourth-quarter adjusted earnings of 30 cents a share–down from 46 cents a share in the year-earlier period, but above the consensus analyst estimate of 29 cents a share. Fourth quarter revenue from display advertising, excluding traffic costs, fell by only 5% to $464 million.

The vast majority of Yahoo’s market value has been tied up in its investments in China and Japan. Mayer said regarding the “Baba” spin-off, “This level of capital return is historic, especially for a company of our size.” She added that the company would hold on to its 35.5% stake in Yahoo Japan, which is valued at another $2.3 billion.

Yahoo was able to sell shares in Alibaba’s September 2014 initial public offering to clean up its own balance sheet, but still owned a 15% stake of the Chinese e-commerce giant. Yahoo’s worldwide non-Asian business had been valued by shareholders at essentially zero before today.

While revenue from desktop display ads continues to shrink, Mayer has been positioning Yahoo to focus on newer ad businesses like mobile, social and video. Revenue, minus commission paid to partners for Web traffic, was on target at $1.18 billion. Search revenue, excluding traffic costs, was flat at $462 million. But paid clicks increased by 10% and price per click rose 7%, according to the Wall Street Journal.

Overall, it was a great day for Yahoo. Marissa Mayer appears to be gaining traction in a turnaround of an Internet pioneer that most of Wall Street thought would be impossible.