Yahoo has completed a long-awaited $7.6 billion deal with China's
Alibaba Group, generating a windfall that could help ease the pain of
Yahoo shareholders who have endured the company's foibles during the
past few years.
After Yahoo distributes most of the proceeds to its
shareholders, its recently hired CEO Marissa Mayer will still have an
extra $1.3 billion to finance acquisitions or hire new talent as she
tries revive the company's revenue growth.
Tuesday's resolution
comes four months after Yahoo Inc. and Alibaba Group Holding Ltd.
outlined the details of a complex transaction that took more than two
years of on-again, off-again negotiations to hammer out. The deal will
give Alibaba greater autonomy as it prepares to pursue an initial public
offering of stock within the next three years, while rewarding Yahoo
for one of the few moves that has gone right for the troubled company in
the past few years.
Yahoo paid $1 billion for a 40 percent stake
in Alibaba in 2005 and is now reaping a huge return. Alibaba is paying
$7.1 billion in cash and stock to buy back half of Yahoo's holdings.
Another $550 million is being paid to Yahoo under a revised technology
and patent licensing agreement with Alibaba.
After paying taxes,
Yahoo estimates it will pocket about $4.3 billion to supplement the $1.9
billion in cash the company had as of June 30.
Yahoo, which is
based in Sunnyvale, Calif., plans to spend about $3 billion of the
Alibaba proceeds buying back its own stock in the upcoming months,
leaving Mayer with some financial flexibility to pay for other items on
her turnaround agenda.
"This yields a substantial return for
investors while retaining a meaningful amount of capital within the
company to invest in future growth," Mayer said in a statement.
The decision on how to handle the proceeds may have reflected a compromise between Mayer and Yahoo's board.
Before
hiring Mayer away from Google in July, Yahoo had pledged to distribute
virtually all of the proceeds from the Alibaba sale to its shareholders.
But
the company wavered from that stance last month when it filed
regulatory documents disclosing that Mayer was considering holding on to
the money to help carry out her vision for Yahoo. Without providing
specifics, the documents said Mayer was mulling possible acquisitions.
Analysts
have speculated that Mayer may try to make a big splash by putting
together a takeover offer for one of the Internet's hot websites, such
as online scrapbook Pinterest or check-in service Foursquare.
Another
big payoff looms for Yahoo when Alibaba goes public, an event expected
by the end of 2015. Alibaba, which owns China's version of eBay and
e-commerce sites, has the right to buy back half of Yahoo's remaining 23
percent stake before the IPO. Yahoo then could chose to sell its
remaining Alibaba stock after the shares begin trading.
Alibaba
currently has a market value of about $40 billion, based on the prices
paid for the stock that the company recently sold to raise enough money
to finance the Yahoo deal. Yahoo, in contrast, has a market value of
less than $20 billion.
A big chunk of Yahoo's value remains locked
up in Alibaba. Based on Alibaba's market value and the preferred shares
it just picked up, Yahoo is still sitting on Alibaba stock worth about
$8.9 billion. That amount will increase if Alibaba is able to continue
to thrive as more people in China get online access.
"The
completion of this transaction begins a new chapter in our relationship
with Yahoo," Alibaba CEO Jack Ma said in a statement.
While
Alibaba has been growing, Yahoo has been shrinking. The contraction has
occurred even as the advertisers that provide most of Yahoo's revenue
have been spending more money on the Internet. Most of that online
marketing has been flowing to Internet search leader Google Inc. and, to
a lesser extent, Facebook Inc.'s popular social network.
Yahoo's
financial funk has depressed its stock for years, increasing the
pressure on the company's management to extract money from its Alibaba
investment to reward its shareholders.
Since beginning its
discussions with Alibaba in 2010, Yahoo has had five CEOs, including two
interim leaders. The deal head already been agreed upon in May, while
Yahoo was being run by Ross Levinsohn, who left shortly after the
company hired Mayer in July.
Although Mayer is highly regarded in
the Internet industry, investors still seem skeptical about whether she
can find a way to pump up a stock that has been stuck below $20 for the
past four years. The stock was trading around $35 when Yahoo invested in
Alibaba seven years ago.
Yahoo shares added 22 cents, or 1.4
percent, to end Tuesday's session at $15.90. That's about the same level
where the shares stood when Mayer took the helm. The technology driven
Nasdaq composite index has climbed 10 percent during the same period
while the broader Standard & Poor's 500 has risen by 8 percent.
Buying
back stock could boost Yahoo's stock by reducing the company's
outstanding shares. With fewer shares trading, it will be easier for
Yahoo to increase its earnings per share one of the yardsticks that
investors rely on to evaluate a company's value.