Monday, May 21, 2012

Yahoo! (Nasdaq: YHOO) Makeover Continues With Alibaba Deal

Yahoo! (Nasdaq: YHOO) Makeover Continues With Alibaba DealShawshank, VA 5/21/12 (StreetBeat) -- Over the weekend Yahoo! (Nasdaq: YHOO) finalized a deal to sell half of its long-standing 40% stake in Chinese e-commerce company Alibaba. The deal is valued at $7.1 billion -- $6.3 billion in cash and $800 million worth of newly minted Alibaba preferred shares.

The deal gives Yahoo! liquidity and a clarified mission, but it comes at a price. Activist investor Daniel Loeb recently cited reports valuing all of Alibaba at $63 billion. If that's in fact the case, Yahoo! just sold $12.6 billion worth of assets at a more than 40% discount.

Yahoo! will also take a tax hit on the agreement that could reduce the net cash the company receives to somewhere in the neighborhood of of $4 billion, according to Kara Swisher at the influential web site As Swisher notes, the price the sides agreed upon values Alibaba at $35 billion, or some $28 billion below the figure Loeb has pointed to.

Whatever the final tally, Yahoo!'s press release says the company "intends to return substantially all of the after tax proceeds to shareholders." Yahoo! increased its share buyback program by $5 billion in the same release.

Any discount the company received was worth it, at least in terms of giving shareholders and employees clarity regarding Yahoo!'s strategy. Interim CEO Ross Levinsohn has been focused on ad sales at Yahoo!, and though he wasn't behind the Alibaba deal (he's been at the post for a week), he was one of Loeb's choices for Yahoo!'s CEO job.

Shares of Yahoo! were more active than normal on the news, with volume an hour into trading heavier than what's recorded on a usual full day. The shares have been between $15.10 and $16 following the Alibaba plan and were recently up 10 cents for the session at $15.52.

BlackBay Group's Todd Schoenberger thinks the sale is an excellent move for Yahoo!, saying it "improves the gravitas of the entire organization." Schoenberger says the success or failure of the deal will ultimately depend on what the company does with the money.

A more aggressive move into media is, in the words of Schoenberger, a "spectacular idea," but it's not Yahoo!'s only play. There are far more interesting options that could be funded by the proceeds of the Alibaba deal, the least compelling of which is a share buyback.

Whatever Yahoo! chooses to be, what it's not is a venture capitalist focused on China. If Yahoo! shares are as undervalued as Loeb suggests, it's a function of the Street not knowing where the company was going as a core business, not the success or failure of Alibaba and the Chinese B2B market.

Between Loeb -- who owns 6% of Yahoo! stock -- getting three board seats, yet another change at the top and the Alibaba deal finally closing, Yahoo! seems to be getting proactive for the first time in years. Add to that the company's decision in April to cut roughly 2,000 jobs as part of its cost-cutting and refocusing efforts, and it's been an extremely busy few weeks for the Sunnyvale, Calif.-based company.

To shareholders and employees, any move is better than sitting still.

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