) has finally completed a long-awaited $7.6 billion deal with the
Chinese e-commerce firm Alibaba Group Holding Ltd. The
closing of the deal comes as a relief for both Yahoo and
Per the agreement, Yahoo sold half of its stake in Alibaba, or
approximately 20% of its shares, to the Chinese e-commerce company
for about $7.1 billion, comprising $6.3 billion in cash and up to
$800 million in newly-issued Alibaba preferred stock. Alibaba also
made a one-time cash payment of $550 million under a revised
technology and patent licensing agreement with Yahoo. Yahoo had
originally acquired the 40% stake in Alibaba in 2005 for $1 billion
and is now reaping a huge return.
As expected by Yahoo, the deal yielded about $4.5 billion after
taxes. Yahoo intends to distribute $3 billion of its after-tax cash
proceeds from the deal to shareholders. This is in addition to the
$646 million down payment that it has already returned to its
shareholders through buybacks.
After the distribution, the new CEO Marissa Mayer will have
enough cash to improve the company's offerings. Mayer wants to
bring a new product focus to the company and spend some of the cash
on acquisitions. We believe the company has an extra $1.3 billion,
which if used prudently could revive the company's revenue growth
to some extent.
Yahoo still retains roughly 20% of Alibaba's common stock,
valued at $8.1 billion. According to the deal, Alibaba will have to
repurchase another quarter of Yahoo's stake at the price of its
initial public offering (IPO), or else the web portal has the right
to sell those shares in the IPO.
Since 2006, Yahoo has been struggling to improve its financials
and build shareholder confidence. But the company has failed to
turn around and bring any significant financial improvement. In
fact, Yahoo's competitors, both
), have been consistently eating into Yahoo's business over the
years. We believe that this deal has given enough cash to the new
CEO to reinvest in some new initiatives that could restore Yahoo's
position, as well as shareholder confidence.
The company is up against the likes of Google,
) and Facebook, the world's most popular social-networking
Yahoo shares carry a Zacks #2 Rank, implying a Buy rating for
the near term.
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