Yahoo! Inc. (NASDAQ:YHOO) holds a 15.4% stake in the Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA), valuing around $38 billion. It holds another $7 billion worth investments in Yahoo Japan. One may note here that the market cap of Yahoo in itself is worth $44 billion. This makes the valuation of Yahoo’s core business being an internet company to a negative value. This is inspite the fact Yahoo is the third biggest search engine and earns revenue of $4 billion dollars every year.
This implies that the shareholders are holding on to their investment in the company not because of its core business but because of its investments in other entities. Before the current situation destabilizes the main business, Yahoo’s CEO, Marissa Mayer, announced in January 2015 that it would establish a separate entity, which would be holding Yahoo’s investments in Alibaba. The logic behind this move is that Marissa wants Yahoo to establish itself as a successful company on its own. Alibaba seems unbothered by the move as remarked by its CEO, Joe Tsai, in a television interview. However, Yahoo in itself would certainly be affected since it would lose out on valuable cash resources required for acquisitions or even operating expenses. However, its Chief Development Officer, Jackie Reses, says there would be no such difficulty.
The story of Yahoo’s investment in Alibaba has its own history. It started when the Company wanted to make an investment in China but failed to turn around. In quest for a partner there, the company ended up investing $1 billion acquiring 40% stake in Alibaba, a Chinese e-commerce company then. In next few years, Yahoo’s fate tumbled down while Alibaba was growing fast. Infact when Microsoft Corporation (NASDAQ:MSFT) made a hostile bid for Yahoo in 2008, the move could be avoided only because of its holdings in Alibaba.
In recent years, several of Yahoo’s shareholders have been trying to force the company to sell back its investments in Alibaba and return the money received to its shareholders. One such shareholder was Eric Jackson who realized that Alibaba was going to boom in days to come. He then joined hands with a hedge fund manager, Daniel Loeb of Third Point. The latter took a big stake in Yahoo and demanded the management to sell of the Alibaba’s holdings. This demand was welcomed by Alibaba’s management comprising of its CEO and CFO, Jack Ma and Joe Tsai, respectively.
The then CEO of Yahoo, Scott Thompson, resisted the sell-off but Daniel Loeb succeeded in making him resign in May 2012. The next CEO gave in to the shareholders’ demand and agreed to sell off around half of its stake in Alibaba, i.e. around 535 million shares at $13 per share. This wreaked havoc for Yahoo, since the deal was also taxable in nature and more than half the proceeds were lost in taxes. Even the 85% of the remaining amount was handed over to the shareholders. There was also a deal that whenever Alibaba went for public offer, Yahoo would sell half its remaining stake, that is around 261 million shares. This would also be a taxable transaction.
By the time this deal got completed in September 2012, Marissa Mayer had taken over as its CEO and Jackie Reses as its chief development officer. Mayer began to work on Yahoo’s strained relations, with Alibaba and chose Reses as Yahoo’s representative on Alibaba’s board. Reses started observing latter’s day to day affairs closely and even visited China a number of times.
In 2014, Alibaba went for a public issue and as per the terms of agreement, Yahoo had to sell off its shares. However, by this time, Reses managed to revive some of the lost ties and the deal was renegotiated. Yahoo actually sold only 140 million shares for $9 billion. Though not a very favorable arrangement, the company managed to save billions post-renegotiation.
Yahoo still had around $40 billion worth of investment in Alibaba. This attracted attention of its various stakeholders one more time and they again started pushing the company to sell of its stake in Alibaba and pay back the shareholders. One of them even asked the management to merge with AOL, Inc. (NYSE:AOL) rather than trying to revive the fortunes of its internet business. By this time, Meyer was ready to separate Alibaba from Yahoo.
So, in January 2015, she announced that Yahoo would establish a separate entity, called SpinCo., which would hold all the investments Yahoo had in Alibaba. In return, all the existing shareholders of Yahoo would be entitled to one share each of Yahoo and SpinCo. The arrangement is expected to take off in full form later this year. This arrangement would also save the company from paying huge tax proceeds. Now, Yahoo will reflect a valuation, which would entirely be on its own merit, though it still has $7 billion worth investments in Yahoo Japan.
Though the critics are still skeptical of the move, saying that it would invite various hostile bids for Yahoo, Meyer is unfazed. She is currently focussing only on turning around the company and reviving its lost glory. Meanwhile, some of the shareholders are also hopeful that Yahoo revives its business and the share price touches the figure of $80.
