Exit Marissa, What’s Next for Yahoo.

What happens next to the newly named Altaba after the departure of Yahoo directors, Marissa Mayer and David Filo? Altaba itself gives a description of things to come: a company that is an ALTernative to AlibABA. Ahead are more asset sales, so that all that remains is Alibaba stock.

Game Plan 

After the Verizon sale, the remaining board  – Tor Braham, Eric Brandt, Catherine Friedman, Thomas McInerney, and Jeffrey Smith – will have the talent for turning the old Yahoo into a closed-end investment fund. Getting there will still require work and financial expertise.

Inside the old Yahoo is stock with unrealized gain, patents, and cash. The end game is removing these assets so only the Alibaba shares remain. Then the Alibaba shares can either to sold to Alibaba or transferred to Alibaba in a merger. Merging with Alibaba would be a tax-free method for getting the shares out of Altaba.

Cashing Out 

Jeffrey Smith’s Starboard Value LP owns 12 million Yahoo shares that are worth approximately $550 million. As board member and investor, Mr. Smith has very incentive to maximize the value of Altaba shares. So if Mr. Smith’s real goal is not a closed-end investment fund, but something that is an alternative to owning actual Alibaba stock, then the other assets must go.

Hopefully Yahoo will be successful with the sale of its online assets to Verizon for $4.8 billion. The next step will then be returning the cash to shareholders through dividends or stock repurchases. Remaining board members should be astute enough to return cash through buying back stock since it is more tax efficient for shareholders than dividends.

Maximize Value

Eventually the patents will need to be sold along with the Yahoo Japan stock. But the Yahoo board does not intend to sell the Yahoo Japan, which at first makes sense. The Yahoo Japan shares were purchased for $2 billion and are currently worth around $16 billion. So after selling the Yahoo Japan shares and paying the tax bill, only $10 billion of cash would available for shareholders.

It does make sense to sell the Yahoo Japan shares to achieve an ALTernative to AlibABA. In fact, in the same proxy statement, the board said it …. currently believes that it is more likely that capital may be returned from a sale of Yahoo Japan Shares than Alibaba Shares. Remember selling either the Yahoo Japan or Alibaba shares would result in large tax bills, but the goal seems to be leaving Altaba will only Alibaba shares.

Yahoo’s market value is still less than the sum its underlying assets. Remaining board members, especially Mr. Smith, will continue to do anything to maximize shareholder value; something Marissa Mayer and David Filo were not able to do.

 

Trump Saves Yahoo, Not You?

Trump’s intent to slash the corporate tax rate could help many tech companies, especially Yahoo. Like regular people, corporation pay taxes on income and Yahoo has assets, which, if sold are subject to the currently high corporate tax rate. Lowering the corporate tax rate would mean more money for Yahoo and less for the Government.

High corporate tax rates have already caused Yahoo to pay a lot to the Government. Back in September 2014, after Marissa Mayer sold a portion of Alibaba shares, Yahoo paid $3.3 billion in taxes to the Government on a $9.4 billion sale. This left shareholders with only $6.1 billion; that amount would have certainly been more under Trump’s corporate tax rate.

Unlocking

Trapped inside Yahoo is not only Alibaba shares, but shares of Yahoo Japan. Getting the Alibaba and Yahoo Japan shares out of Yahoo, without incurring a large tax bill, has vexed many managers. Not only does Yahoo pay taxes on any gains, but the gains are taxed again when distributed as dividends to shareholders. This is why activist investor,  Starboard Value, looked for tax-free ways to get the assets out of Yahoo.

One method tried was not to sell the Alibaba and Yahoo Japan shares, but to distribute the shares to Yahoo shareholders in a tax-free spin-off. When that didn’t work, Starboard Value proposed the sale of Yahoo’s online business with the Alibaba and Yahoo Japan still trapped inside Yahoo. With the online business gone, the true value of the Alibaba and Yahoo Japan shares should be realized.

In July 2016, Yahoo proposed selling the online business to Verizon for $4.8 billion.  If Verizon could wait, then Yahoo could save money. As with the Alibaba stock sale in 2014, Yahoo will owe taxes on the sale of the online business. Yahoo is selling the online business for $4.8 billion and the online business has a value of $4.1 billion to Yahoo.  Thus the gain on ‘this’ sale is $700 million. Yahoo estimated the tax bill on the sale to be $290 million; that amount would be $140 million under Trump’s lower tax rate.

ALTernative AlibABA

After the sale, Yahoo will be replaced by Altbaba. The new name could be a play on “ALTernative AlibABA” because the newly named company will hold the remaining Alibaba shares. Altaba will also have the Yahoo Japan shares, patents, and cash. Over time, the cash will be distributed to Altaba shareholders as either dividends or tax-efficient, stock repurchases.

Altaba’s stated goal is tracking the “combined investment return of the Alibaba Shares and the Yahoo Japan Shares”. Tracking is not assured since Altaba will include other things such as the patents and tax liabilities. Yahoo estimates it owes the government $12 billion in taxes if the Alibaba stock was to be sold. So the ultimate value of the Altaba is the market value of Alibaba shares ($31 billion) and Yahoo Japan shares ($3 billion) less the tax liabilities ($12 billion). Based upon numbers released in a September 2016 proxy, that amount would be $22 billion.

Altaba shareholders could benefit from Trump’s lower corporate rate. A lower corporate rate would cut in half the estimated tax liability on the Alibaba shares. Instead of tax liabilities of $12 billion, the new Altbaba would only owe taxes of about $6 billion. The lower tax liability would increase Altaba’s value from $22 from $28 billion.

Conclusion

Trump proposed corporate tax rates may not change the timing and structure of the Yahoo’s proposed transactions. But for Yahoo shareholders the lower tax rate may impact value of their investment.

Disclaimer: Post intended only for information and not for investment purposes.