The most exciting business headline today will have to be that of Yahoo! Inc. (Nasdaq: YHOO) earnings.
Even more interesting than the report will be the quarterly earnings call, when YHOO management will likely be grilled by analysts on its plan moving forward.
You see, YHOO has relied on its large stake in Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE: BABA) to carry its flagging core business. In eight of the last 10 quarters, core business operations have fallen year over year.
Compare that to the income generated by equity interests, which includes YHOO's BABA holdings and a 35% stake in Yahoo! Japan, a figure that has grown every quarter. Most recent reporting shows that Alibaba grew sales by 72.4% in 2013.
It all began in 2012, when YHOO reduced its stake in BABA from 40% to a little over 20% with the sale of more than 500 million shares. The sale netted $2.8 billion for YHOO.
After that 2012 sale, YHOO and BABA entered into a repurchasing agreement that would set a roadmap for YHOO's eventual exit from investment in the company following BABA's IPO.
And when BABA did go public, YHOO sold another 140 million shares and added $9.5 billion to its coffers.
Now, YHOO holds a 15% stake in BABA and still holds 383.6 million shares. This would put YHOO's current stake at close to $35 billion, and that is only expected to grow if BABA continues to put up numbers.
"The value infused by the Alibaba deal is a huge windfall for Yahoo shareholders and Yahoo management," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Whether or not something can be done - whether Yahoo can actually grow its business - remains to be seen."
With the Alibaba IPO last month, and YHOO's reduced stake in the company, it's becoming clear to investors that Chief Executive Officer Marissa Mayer can't evade the heat forever. No longer will the booming sales growth of YHOO's investments in Asian markets be able to soften the blow of YHOO's core operations' dwindling business.
For YHOO shareholders who want to see a good return on their holdings, and who want to see sufficient windfall profits from YHOO's further sales of BABA shares, here's what to look out for in earnings...
YHOO's Plans for Mergers and Acquisitions
The best thing YHOO's shareholders could hear from earnings this quarter is that YHOO plans to heed the advice of Starboard Value LP.
Starboard is an investment management firm that took up a large stake in YHOO after the Alibaba IPO and instantly fired off a letter to Mayer with its suggestions to unlock value in the stock and deliver to shareholders.
Among the suggestions was for YHOO to halt its "aggressive acquisition strategy."
Shareholders should welcome any indication that Mayer is going to pull back from her buying spree. It has cost YHOO $1.3 billion in capital since the second quarter of 2012, according to the Starboard letter.
That's because YHOO is not going to orchestrate a turnaround and unlock shareholder value by making acquisitions like its $8.3 million purchase of the Indian startup, BookPad, which hosts cloud-based documents.
"You can't buy second-tier assets and bolt them all together and get a first-tier company," said Money Morning Executive Editor Bill Patalon.
The only acquisitions that would help would be big-ticket purchases of companies like Snapchat or Pinterest.
But pursuing those companies would only touch off a bidding war with the much more successful social media companies who will likely be eyeing the same properties.
YHOO could run the risk of not acquiring either, or acquiring an asset at such a high cost, that it can't continue to feed more money into that venture and the purchase becomes a lost cause.
"Are these guys really going to be able to afford to buy the assets they need to transform their business and stay relevant?" Patalon said. "Or in doing so are they really going to fritter away this one opportunity to make sure their shareholders are well compensated?"
How Much Shareholders Will Get from Alibaba Cash and When
YHOO promised earlier in the year to deliver half the proceeds of its 140 million share sale of BABA to shareholders.
Now shareholders should look for any hints as to how YHOO will compensate shareholders when they offload the remaining 15% stake.
YHOO's shares of BABA are on lock-up for a year, so it may be too early for Mayer to give an explicit breakdown or timeline of the YHOO disinvestment, but the company can only toe the same tired mantra of being "committed, as an organization, to acting in the best interests of the company and all of its shareholders," for so long before shareholders demand a clearer picture of the future.
Addressing Tax Efficiencies
YHOO is going to have to find a way to cut its capital gains tax bill on its sale of BABA shares if the company wants to deliver the best value to shareholders.
With the initial 2012 sale, the after-tax gain brought YHOO's income down from $4.6 billion to $2.8 billion.
With such a large tax burden on that sale, it makes sense that similar concerns have abounded over YHOO's current holdings and inevitable sale.
So how can YHOO maximize gains?
Barron's suggested last month that YHOO could follow the lead of Liberty Interactive Corp. (Nasdaq: LVNTA) Chairman John Malone. In May, Malone spun off his company's 22% stake in TripAdvisor, and its 100% ownership of BuySeasons into a separate $3 billion company.
This triggered a U.S. tax law that isn't subject to the same corporate-level taxes as an outright stock sell-off.
It will take a number of quarters for YHOO to determine the most tax-efficient route, and shareholders should be looking for any hints in today's earnings report.
More on Alibaba: Many analysts initiated coverage of Alibaba this week and suggested a "Buy" rating, but even those "bullish" price targets fall short of capturing the Chinese tech giant's true value...
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