October 27, 2016

Mayer’s ‘Plan To Stay’ Means Finding Home For Rest Of Yahoo

Marissa Mayer, president and chief executive officer of Yahoo Inc., in San Francisco.

Marissa Mayer’s work at Yahoo Inc. — or what’s left of it — is far from over.

Moments after announcing plans to sell Yahoo’s core assets to Verizon for $4.83 billion, she sent a note telling employees she’s not going anywhere for the time being.

“I plan to stay, I love Yahoo,” Mayer reiterated on a call with analysts and investors. “For the immediate future, I have two priorities: obviously, seeing the transaction through to closing and protecting the value in our equity stakes.”

Yahoo’s long-term plans for Mayer are not yet clear. In the meantime, she’s got her hands full figuring out integration plans and dealing with $40 billion in assets that Verizon isn’t acquiring. What’s staying behind includes the Alibaba Group Holding and Yahoo Japan stakes, as well as cash and some patents. The remaining portion will become a new publicly traded investment company — temporarily nicknamed Remain Co. — a structure that Yahoo promises to use to appease shareholders.

The management team and board will have the option to sell parts or the entirety of Remain Co., or hold onto it and reap the value more slowly. Here’s what the company may do with the assets:

– Alibaba: This golden goose won’t be finding its way directly to investors’ hands anytime soon – due to a potential multibillion-dollar tax bill that would likely come with spinning off Alibaba. That wrinkle is what put the core assets on the auction block in the first place. Early last year Yahoo thought it could monetize its Alibaba stake while escaping a big tax hit.

The plan was for Yahoo to park its Alibaba stock in a new company along with a small Yahoo division. But in September, the U.S. government denied its bid to waive the tax cost for the transaction.

Instead of trying to unload the shares, the new investment company now plans to hold them potentially indefinitely with “no current intent” to sell those in a taxable deal, Yahoo director Tom McInerney said on the call. This means Remain Co.’s stock price should reflect the lack of expectation for a transaction, he said. It is possible, though, for a buyer to come in and buy the company without incurring a “corporate-level tax,” he said.

He didn’t rule out a so-called hook stock-type transaction, where Alibaba would buy the investment company and thereby own a subsidiary that held its own shares. Such a setup would be contingent upon the Chinese internet giant showing interest, followed by Yahoo’s management team returning said interest. In short: It’d be very complicated.

– Yahoo Japan: Remain Co. will have a bit more flexibility with its 35.5 percent stake in Yahoo Japan. For now, the plan is to hold on to that and harvest cash from it. There are ways to sell the assets without incurring the full tax burden, though the company would also consider selling shares in taxable transactions, McInerney said. The management team and board will evaluate all options and figure out what would add the most value and make the most sense.

– Cash: Remain Co. stands to retain most of the money from the Verizon deal after taxes, which means that the company would have more than $10 billion in cash. At some point in the future, Yahoo’s board promises to return all of it to shareholders, except for what’s needed to operate the company.

McInerney said he couldn’t comment on the timing or whether it will be in the form of dividends or buybacks, because the new company has yet to reveal its proxy and therefore has material inside knowledge not available publicly. He did say that the new company is “not intending to make new investments with the cash.”

– Patents: The new investment company will retain the non-core patents and figure out whether it makes more sense to sell the portfolio or hold onto it and directly monetize, such as through licensing. About 30 global technology companies had shown interest in the patents during the bidding process for Yahoo’s core assets, but the management team decided to hold off on considering any offers until the main deal was struck. Verizon will get to take the patents that are part of the core business and receive a license for the ones they won’t own.

Going forward, Yahoo will start looking at options for the portfolio. McInerney said the team will exercise patience when dealing with the patents and will evaluate all the possibilities before making a decision.

– Mayer’s Future: While Mayer has her work cut out for her probably at least until the integration of Yahoo with Verizon has been completed, expected early next year, her steps after that are unclear.

“We’ve done so much here at Yahoo I want to make sure that it lands well and integrates well,” Mayer said in an interview. “And I’m open-minded as to my role and future possibilities.”

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