Some tech giants currently spend their days designing driverless cars or building virtual worlds. At Yahoo, the big challenge that occupied its leaders this year was working out how to spin off its stake in a Chinese internet business without racking up a massive tax bill.
That a Silicon Valley company whose roots go back to the earliest days of the web is stuck figuring out accounting tricks is a sign of just how dire the situation is at Yahoo. Another sign: Yahoo is now considering giving up entirely, and becoming a shell company for its valuable stake in Chinese e-commerce giant Alibaba.
On Wednesday morning, Yahoo said that it was giving up on its spinoff of the Alibaba stake and instead will focus on "alternative transaction structures to separate the Alibaba stake," including spinning off "Yahoo’s assets and liabilities other than the Alibaba stake" to its shareholders as a separate company.
Yahoo's plan to spin-off what most people think of as Yahoo could take "a year or more," the company said. If Yahoo split off its non-Alibaba core business, it could be more easily snapped up by a buyer.
So what is going on at Yahoo? Here are a few things to know about the current state of the company.
1. Some say Yahoo itself is worth nothing, or less than nothing, but that's an exaggeration
Here's the deal. Yahoo's current market value is about $32.9 billion.
This is much less than the value of the things it owns. Yahoo's stake in Alibaba is worth about $32.4 billion, and its stake in Yahoo Japan is worth about $8.7 billion. It also has $1.3 billion in cash and about $5.5 billion in other securities, and $1.2 billion in debt. All that adds up to around $46 billion.
So if the market values Yahoo at $33 billion, does that imply the actual Yahoo business — the websites, the apps, the digital advertising tech — is worth less than zero?
Not quite — and here is where those tax issues come into play. Yahoo's investments in Japan and China have all gained value massively over the years, and all that is subject to taxes if it's sold. Hedge fund Starboard Value estimates the tax bill on Alibaba shares put their true value to shareholders at around $19.6 billion; the Yahoo Japan stake would be worth around $5.3 billion.
Once you take those taxes into account, it looks more like Yahoo investors are valuing its actual business at a little over $2 billion. That's a figure that has been promoted by activist investor Starboard Value, as well as analysts at Nomura and Pivotal Research.
2. Yahoo's previous plan was to avoid the tax question entirely
The plan was to create a new holding company for its very valuable Asian investments, with current Yahoo shareholders getting equal shares in the new business.
The company hoped the spin-off would involve no taxes being paid for the time being — shareholders would be responsible for the tax bill if and when they decide to sell. But the IRS needed to approve the details, and it has taken a skeptical eye so far, declining to pre-approve it.
Officials have cast doubt on the strategy Yahoo was using to avoid taxes on the deal, which involved including a token "operating" company among the assets being spun off — in this case, Yahoo's small business marketing and sales unit. The uncertainly around how the IRS would consider the deal meant uncertainty around a potentially massive tax bill.
"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," Starboard Value wrote in its November letter.
3. But now Yahoo is turning to plan B
Concept: Instead of getting rid of the hugely valuable asset and keeping a declining core business, how about doing...the opposite?
Some, including Starboard Value, have said the uncertainty about taxes is reason enough to consider getting rid of the business we know as "Yahoo" and turning the current company into a holding vehicle for shares in Alibaba and Yahoo Japan.
Under such a deal, the core Yahoo business would need to either be sold to a new buyer or spun off into a separate publicly traded company. That is the option Yahoo announced it would explore today after ditching its previous plan for a spin-off.
4. The core Yahoo business is still pretty big. But it's in decline
Yahoo's core business, while it hasn't really grown in years, was able to churn out $4.3 billion in revenue in the last 12 months, once you take out the money Yahoo spends bringing traffic to its sites. About $1.7 billion of that came from search and display advertising.
Twitter pulled in $1.9 billion in revenue in the last 12 months and posted a loss for the same period. It's still valued by investors at almost $18 billion, because investors are optimistic about its future: Twitter's revenue has grown 58% in the last year, while Yahoo's has shrunk 8%.
"Yahoo’s core business is in seemingly permanent decline,” said Pivotal Research analyst Brian Wieser, who values it at $1.9 billion.
Nomura expects the company's revenue to shrink 8% and then flatten for two years due to advertisers abandoning the old-fashioned display advertising that Yahoo is still heavily reliant on.
Market research company eMarketer projected that Yahoo's market share in digital display advertising in the U.S. will fall, from 4.6% of the U.S. display advertising market in 2014 to 3.9% in 2015, while Twitter’s would grow from 5% to 5.9%.
In mobile advertising, where Yahoo has invested billions of dollars, time, and management attention, eMarketer projects Yahoo will drop to below 3% market share this year and continue to fall through 2017, getting outpaced by Twitter and swamped by Google and Facebook.
5. In other ways, Yahoo is still a giant
There may be cooler kids on the block these days, but Yahoo still has a massive presence on the web.
According to ComScore, Yahoo has a global audience of 618 million — the fourth largest of any company, behind only Google, Microsoft, and Facebook. In the U.S., Yahoo's 211 million desktop and mobile unique visitors make it the third biggest destination, behind Google and Facebook.
"Our overall network including Tumblr continued to serve a global user base of more than 1 billion monthly active users," Yahoo CEO Marissa Mayer said in a recent earnings call. Facebook, in comparison, has over 1 billion daily active users. In terms of headcount the two are comparable: Yahoo has 10,700 full-time employees, while Facebook has about 12,000.
Yahoo's net revenue has been slowly declining since Marissa Mayer took over in 2012
6. And Yahoo is still spitting out plenty of cash
Nomura expects Yahoo to have $832 million in earnings before interest, taxes, and amortization in 2016, meaning that investors value the company at about 2.6 times its forward earnings.
When AOL was bought by Verizon this year for $4.4 billion, the deal valued AOL at about 8.5 times its projected 2015 Ebitda earnings.
In that case, Verizon was placing a large value on AOL’s investment in digital advertising technology, something the telecommunications giant will increasingly need in the future. Pivotal suggested another telecom company, or even Verizon, could be a buyer for Yahoo. “The big question is whether anyone would actually show up with a meaningful bid,” Weiser wrote.
7. There are some likely buyers if Yahoo is up for sale
Investors on the stock market typically don't like companies whose revenue and earnings are declining — Yahoo stock is down 32% this year — but it could be useful as part of another company, or in the hands of private owners content to keep squeezing out whatever profits remain.
The Wall Street Journal has reported, citing anonymous sources, that Verizon, IAC, News Corp, and Time Inc. “would likely explore” buying some or all of Yahoo, should the company be put on sale.
“It is very possible that private equity firms would find value in Yahoo’s core business," a team of analysts from Nomura said in a note last week. Among private equity buyers Re/code has reported, citing anonymous sources, that TPG would be the “most serious” of those potentially considering a bid.
And if they're not bidding for the shrinking old business, what new thing is there for someone to buy?
Maybe a big, splashy social media platform like Tumblr, which Yahoo recently bought for $1.1 billion, or a video advertising platform (Brightroll, acquired for $640 million), or an e-commerce site (Polyvore, around $200 million), or maybe even a tentative little business live-streaming NFL games.
"The saving grace for Yahoo is that it still has a relatively large user base… and a still-relatively strong (and still-relatively large) sales force,” Weiser wrote in his note. “As long as both of those factors remain in place, there would be time for an acquirer to establish new strategies and develop products while the property continues to generate cashflow."
This post was updated with new information about Yahoo's plans to reorganize the company.