Yahoo urged to sell core business, cancel Alibaba spinoff

An investor that’s been on Yahoo’s case for more than a year has had a change of heart: It now wants Yahoo to sell its core business and hang on to its stake in Alibaba instead of spinning it off.

Starboard Value said in a letter to Yahoo CEO Marissa Mayer and Board Chairman Maynard Webb dated today that it believes selling the Silicon Valley company’s core business is now the best course. Do it now, Starboard manager Jeff Smith wrote, while Yahoo may still be able to attract a buyer.

“We believe there would be considerable interest for Yahoo’s Core Business given the number of unique users, significant search revenue and income, popularity of many of Yahoo’s display properties, and valuable real estate and intellectual property,” Smith wrote.

As for the spinoff of the Alibaba stake, which Starboard had pushed for, forget that, Smith said. We wrote in September that it’s now unclear whether the $23 billion spinoff can be pulled off tax-free because the IRS won’t say for sure whether it will be taxable.

Starboard now believes the tax risk of spinning off the Alibaba stake would be greater than the risk of same old, same old:

“Yahoo is the only Silicon Valley company we know that currently has a stock price almost entirely driven by the value of an entity outside of its control,” Smith wrote. “If you stay on the current path, we believe the potential penalty for being wrong is just too great, and the potential reward for being right is not materially better than the other alternative.”

This new pressure on Yahoo comes after a report less than two weeks ago that the company has hired McKinsey & Co. as part of a big reorganization, as Michelle Quinn wrote.

But Starboard, whose letter is dripping with frustration, doesn’t seem convinced a reorganization will do any good: “As we discussed with you again during our most recent conversation, this past quarter and the public guidance for next quarter actually show accelerated degradation in the performance of the Core Business, making your argument to wait for improvement appear to be grounded more in hope than strategy.”

A Yahoo spokeswoman said the company has no comment.

In the past, Starboard has called for Yahoo to merge with AOL. But AOL in May announced a tie-up with Verizon.

Yahoo shares are down less than 0.5 percent to $32.86 today. They are down about 37 percent for the year.


Photo: Yahoo headquarters in Sunnyvale. (LiPo Ching/Bay Area News Group)


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