Yahoo Inc. nets $4.3 billion after taxes by cutting its 40 percent Alibaba stake roughly in half. This completes the first wave of a repurchase agreement it signed with the Chinese B2B e-commerce company in September 2011.
Yahoo CEO Marissa Mayer said, “The completion of the first stage of the Alibaba share repurchase represents a significant milestone for both Alibaba and Yahoo.” The deal was initially announced in May.
According to a Reuters report, Yahoo acquired a 40 percent stake in the Chinese company in 2005 for just $1 billion and is now making a windfall profit of 760 percent after taxes and fees, a whopping 36 percent annualized return. The calculation takes into account that the portion of the stake it sold only cost $500 million to acquire. Yahoo retains 23 percent of Alibaba, which operates an online import/export hub and also serves domestic B2B clients online. Yahoo’s stake of common and preferred stock is worth $8.9 billion as of Sept. 19, giving Alibaba an implicit value of $40 billion in its entirety.
Yahoo to Return Cash, Alibaba Plans IPO
“The Yahoo board and management have met, reviewed the strategy with regard to the proceeds, and are pleased to announce that we will be returning $3 billion of the proceeds to shareholders in addition to the ‘down payment’ of $646 million made over the past few months,” said Mayer, who became CEO in July. “This yields a substantial return for investors.”
While Yahoo is returning money to shareholders, Alibaba is looking to take the company public and raise money in an initial public offering (IPO), although details have so far not been released. Yahoo can sell half of the remaining stake in the IPO and then completely sell its remaining shares after a customary lock-up period expires. This allows Yahoo to monetize a financial investment that does not have any strategic value, despite the fact that Alibaba runs the Yahoo brand in China and keeps paying $50 million in royalties to its parent per year, according to Morgan Stanley.
Analysts See Deal as Positive
Although the deal was already announced in May, analysts reiterate their positive stance toward the transaction, while voicing caution for Yahoo’s core businesses. “We are encouraged by the recent monetization of half of Yahoo’s stake in Alibaba Group along with subsequent share repurchases. We believe the deal is value creating when factoring in share buybacks,” says a report by J.P. Morgan, which raised Yahoo’s target price from $18 to $19.
Share buybacks usually get investors of utility companies excited and conversely raises eyebrows when performed by a growing technology company, implying that the company doesn’t have a productive place to invest the cash. The expansion of core businesses organically or through strategic acquisitions as well as R&D spending could shield the company from some of the risks that Morgan Stanley cites in a recent report: “Search share loss, lack of a mobile platform, and failure efficiently to monetize remaining noncore assets” are all potentially unresolved business issues.
Therefore, some investments seem necessary and Yahoo is keeping $650 million of the sales proceeds on hand, on top of the $1.5 billion it already has, what Mayer calls “a meaningful amount of capital within the company to invest in future growth.”
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