Yahoo’s course is less certain as it signals internet business up for sale

December 10, 2015, 8:56pm

By Douglas MacMillan and Liz Hoffman, Wall Street Journal on Business Day Live
Photo: Pixabay

Company says it will shelve year-long plan to spin off stake in Alibaba Group into holding company and instead says it will consider sale of core internet business

YAHOO on Wednesday signalled that its internet business is up for sale, dealing a blow to CE Marissa Mayer and setting the stage for what may be the final act of a web pioneer that failed to reinvent itself in the smartphone age.

The company said it would shelve its year-long plan to spin off its stake in Alibaba Group Holding into a holding company because investors feared tax regulators could challenge the spinoff and hit the company with a multibillion-dollar bill.

Instead, Yahoo said it would consider alternatives, including the sale of the core business or a so-called reverse spinoff that would turn the web assets and a stake in Yahoo Japan into a separate, publicly traded company.

Yahoo’s about-face is a rejection of a strategy laid out by Ms Mayer, who is now in her fourth year of an effort that has failed to yield meaningful revenue growth. Ms Mayer had counted on the Alibaba spinoff as a centrepiece to her strategy to unlock value for shareholders and buy time for a revival of a digital-ad business eclipsed by Google and Facebook.

On a conference call on Wednesday, chairman Maynard Webb emphasised Yahoo would proceed with the spinoff of the internet business, a constellation of web properties ranging from Yahoo Mail to the namesake home page that are collectively the third-most visited internet sites in the US.

He said this spinoff manoeuvre may take more than a year to complete and be mired in a complex process of approvals and contract negotiations. But, he reasoned, the potential tax bill would be much lower because the assets have gained far less value than has the $32bn Alibaba stake.

Mr Webb and Ms Mayer said in an interview that a sale isn’t the most likely outcome because they feel the asset is undervalued by the market. "When you are undervalued and people can’t get a picture of the true value you are providing, it’s generally not a great time to sell," Ms Mayer said. "I like the path and the strategy we have chosen."

But Mr Webb said the board has a fiduciary duty to entertain any offers. Yahoo’s positioning may be a negotiating tactic and a way to set a floor price for any potential acquisition offers, analysts say.

A Yahoo spokeswoman declined to comment further.

Announcing a spinoff is often effectively hanging out a shingle. Companies typically prefer sales to spinoffs because they are faster, cleaner and result in cash immediately. What’s more, the main advantage to spinoffs — that they can be done tax-free — is no longer clear for Yahoo. The Internal Revenue Service declined in September to give an advance ruling on the transaction, raising concerns that the spinoff would be treated as a taxable distribution of assets.

Companies whose spinoffs have turned into sales include United Technologies’s decision earlier this year to shed its Sikorsky helicopter unit to Lockheed Martin, and Symantec, which recently agreed to sell its Veritas unit to private-equity firm Carlyle Group after earlier announcing a plan to spin it off to shareholders.

"This is now the politically correct way to say that they are ready to accept offers," said Chris Bulger, an independent tech banker based in Boston who has no affiliation with Yahoo.

"When’s the last time a public CEO stood up and said, ‘I’m not really getting the job done, so the company is up for sale to the highest bidder?’"

Moving forward with a spinoff instead of a sale may invite a proxy challenge by activist investor Starboard Value, which last month called for the company to not only halt the Alibaba spinoff but also find a buyer for the internet business. Starboard argued that any turnaround is likely to prove elusive, and Yahoo’s core business is getting less valuable, not more.

"Making your argument to wait for improvement appear to be grounded more in hope than strategy," the hedge fund wrote in a letter last month to Yahoo’s board. The firm would have to file its proxy challenge by March 26, according to a Yahoo regulatory filing.

Selling the core business would incur taxes, as all asset sales do. But the bill would likely be lower, in part because Yahoo’s internet business hasn’t appreciated as much in recent years as it has struggled. In comparison, Yahoo’s Alibaba stake has soared in value, creating a huge gain that could be subject to taxes.

One potential suitor, Verizon Communications, has publicly indicated it would be interested in exploring a purchase. But people familiar with the company’s thinking said Verizon doesn’t feel a sense of urgency and would want to do a close examination of the company and see what the market is worth.

Private-equity firms are expected to be among those taking a look at Yahoo’s core business, people familiar with the matter said. The company has strong cash flows and a cost structure, such as its employee head count, that could be trimmed. Analysts have valued Yahoo’s core business at about $2bn to $4bn, not including taxes.

That would make it worth as much as five times its expected earnings before interest, taxes, depreciation and amortisation, or Ebitda, this year, according to Cantor Fitzgerald analyst Youssef Squali.

"The implied value for the core is certainly low," Mr Squali said. "The question is, would you be willing to sell it at four or five times Ebitda?"

Yahoo’s closest competitor in online ads, AOL, sold to Verizon earlier this year for roughly eight times Ebitda. Yahoo is unlikely to fetch that high of a multiple because its revenue growth is stagnant and its advertising technologies, such as the video ad service Brightroll, are seen to lag AOL’s in appeal to advertisers.

A spinoff of the core business could give Ms Mayer time to cut costs and sharpen Yahoo’s focus to make it more attractive to a buyer. The CEO has hired management consultant McKinsey & Co to look for areas of the company to cut, a person familiar with the matter has said. Ms Mayer said on Wednesday she would announce a more detailed reorganisation plan on the fourth-quarter earnings call next month.

Ms Mayer, who has helped select most of Yahoo’s directors, lost one potential ally on the board on Wednesday when Max Levchin, her former colleague at Google, announced his resignation. Mr Levchin, a serial tech entrepreneur who co-founded PayPal, described his departure as amicable and cited his other professional commitments and demands on his time.