After several years of often contentious negotiations that sometimes raised more questions than answers, two of the internet’s biggest players are finally resolving one of their most critical issues. Yahoo! (NASDAQ:YHOO) announced that they have come to agreement with Alibaba over the sale of half of their equity stake in the China-based internet powerhouse. The terms call for Alibaba to pay Yahoo! $7.1 billion, $ 6.3 billion in cash and $ 800 million in preferred stock and a one-time payment of $ 550 million for a technology and intellectual property license. The agreement marks the end of uncertainty as to how and when the issue would finally be resolved. The discussions took place over two years and involved no less than five of Yahoo!’s CEOs at the time. The revolving door in the executive suite that once hosted founder Jerry Yang, Carol Bartz, Scott Thompson, Ross Levinsohn, and now Marissa Mayer. The Washington Post reports that the company should net $ 4.3 billion after taxes and expects to return value to the shareholders by repurchasing outstanding shares of stock.
A Good Decision
Analysts grew concerned in recent months as new CEO Marissa Mayer, who joined the company from Google, revealed that she would spend some of her initial time reviewing the strategic plans that were put in place prior to her arrival to determine if returning some of the transaction proceeds was the best use of the cash. Some worried that she might want to hold-back on paying shareholders to stockpile more cash for potential acquisitions in the future. Ms. Mayer commented that “this yields a substantial return for shareholders while retaining a meaningful amount of capital within the company to invest in future growth.” The company has already repurchased $ 646 million in shares since May, adding to the hope that the Alibaba sale would provide fresh cash to the balance sheet and result in increased buybacks or a special cash dividend payment.
$40 Billion Is Real Money
The complex transaction was made more challenging as Alibaba worked with several investors, lenders and private equity outfits to piece together the financing package. It has been clear for some time that Yahoo wanted to exit Alibaba after failing to build an online presence in China via the offerings of the company. Alibaba’s latest efforts to raise money increased the valuation of the enterprise to $ 40 billion. The company is planning to go public in 2015 and the value of Yahoo!’s remaining 23 percent equity stake is now valued at $ 8.1 billion. Yahoo! can offer some of its shares for sale in the IPO or can wait until after the mandatory six-month lock-up period expires to sell shares. Recent post-IPO trading of shares with Facebook (NASDAQ:FB) has raised some important questions regarding shares offered at the initial offering versus after the lock-up period. Facebook shares have at times traded at less than 50 percent of the share offering price just months ago.
Not Out Of The Woods Yet
Although welcome news, the announcement of the sales and infusion of cash will not by itself cure what ails Yahoo! The once agile and creative internet darling has lost some of its allure in recent years amid leadership changes and an inability or unwillingness to change its tactics. While many competitors like Google (NASDAQ:GOOG) were going after mobile internet advertising, Yahoo! was slow to react and has yet to recover from the misstep. The growth of social media and networking took the internet by storm and Yahoo! has struggled to stay in the game as smaller, more nimble firms have succeeded. Yahoo! has an enormous web presence and if they execute their strategy well, they may regain some of the glory that seems to have escaped them in recent years.