Yahoo (Nasdaq: YHOO) Stock Hopes Ditching Assets Will Spark Turnaround

Finally, after all the negotiations and failed attempts at making a deal, Yahoo! Inc. (Nasdaq: YHOO) has agreed to let China's e-commerce company Alibaba repurchase its shares.

In just over a week since Yahoo ousted CEO Scott Thompson for padding his resume, the search engine giant announced that it would sell half of its 40% stake in Alibaba Group Holding Ltd. with the possibility of selling the rest at some point.

Yahoo will receive at least $6.3 billion in cash and as much as $800 million in newly issued Alibaba preferred stock, the companies said in a statement yesterday (Monday). At the time of an IPO, Alibaba will be required to either buy back a quarter of Yahoo's current stake or let Yahoo sell the shares.

In the announcement, Yahoo also said it would use all of the sale's after-tax proceeds to repurchase its own shares, with the Yahoo board already having approved a $5 billion increase to the firm's current buyback program.

The sale, strongly encouraged by analysts and investors, frees up some cash for Yahoo. Many have been waiting for this deal to come through as talks repeatedly failed over the past year between Yahoo's ex-CEO Carol Bartz and Alibaba.

Some calculations suggest Yahoo may have let go of Alibaba at a steep discount. But a person familiar with the deal said there were provisions which would allow Yahoo to benefit if Alibaba is valued at more than $35 billion when it sets the pricing for its IPO.

Furthermore, the move had to be made, and was one of five things that Money Morning's Keith Fitz-Gerald said he would do if he ran Yahoo.

Keith commented, "Yahoo's been hemming and hawing with Alibaba for too long. This is making investors unhappy and Wall Street uneasy."

Good Move for Yahoo CEO Levinsohn

Although he has only been there a week and maybe had little to do with this actual deal, the fact is the Alibaba deal is a good start for interim CEO Ross Levinsohn.

Levinsohn must find a way to invigorate Yahoo's lackluster appeal to investors as falling revenue, layoffs, management reorganizations and executive departures have caused a dark cloud to hover over the company.

Levinsohn has to pick a focus for YHOO, one that recognizes the tech world's new landscape.

The core advertising model upon which Yahoo was built is dead, as Fitz-Gerald explained. The company has to transition into media to survive.

Whether or not it can successfully transition is another question entirely.

Levinsohn's likely move is to re-orient the company around its media properties, including Yahoo Sports and Yahoo Finance, while focusing less on expensive technology efforts such as search and social networking.

The move should help calm frustrated investors and hopefully give some life to Yahoo stock, which is up slightly on the announcement of the trade.

At Monday's close Yahoo stock was up 1.04% to $15.58 and rose 3.6% last Friday amid speculation that the deal with Alibaba was close to being finalized.

What's Next for Yahoo (Nasdaq: YHOO) Stock

Getting rid of Alibaba was one of the things Fitz-Gerald suggested Yahoo needs to do to get back on track.

Now that that's taken care of, what should the struggling Silicon Valley company do next?

The next logical step would be to abandon Yahoo Japan, according to Fitz-Gerald. To him Yahoo is just wasting time and money in markets that are unlikely to pay off.

Yahoo owns a 35% stake in Yahoo Japan. Analysts have said selling off the Asian assets would raise cash for Yahoo and simplify its structure, making it easier for investors to value its core U.S. operations.

Fitz-Gerald said the company also should consider a bid for a smaller tech operation.

"Some analysts have suggested Twitter or Pinterest as potential targets, but I think both of those would be MySpace-style mistakes," suggested Fitz-Gerald. "It's do-or-die time for Yahoo and the better play may be one of integration with the likes of a Hulu or a Netflix."

If Yahoo doesn't move soon, it could find itself on the other side of the negotiating table.

"If you can't bring a deal home, put the company on the block," said Fitz-Gerald.

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