Why the Yahoo Stock Price Surged 7% Today

yahoo-logoThe Yahoo stock price (Nasdaq: YHOO) surged 6.87% to $36.07 intraday Wednesday amid reports Yahoo is mulling a sale of its core Internet business.

Yahoo's board is holding a series of meetings this week on whether to sell its Internet properties, move ahead with plans to spin off its 15% stake in e-commerce giant Alibaba Holding Group Ltd. (NYSE: BABA), or a combination of the two.

The meetings come as Yahoo continues to struggle with its online presence dwarfed by Internet leader Google.

Yahoo's global slice of the search engine market is a distant third at 7.91%. Google leads with 70.69%. Microsoft Corp.'s (Nasdaq: MSFT) Bing is second with 12.14%, according to real-time analytics firm NetMarketShare. Facebook Inc. (Nasdaq: FB) has also emerged as a key competitor.

As Yahoo's Internet search segment has sputtered, so has the unit's value.

Yahoo's 15% stake in Alibaba is now worth some $32 billion. Its 35% stake in Yahoo Japan is now worth about $8.5 billion. At the end of Q3, Yahoo's cash and short-term investments totaled $5.9 billion. That would mean investors are valuing Yahoo's core business at less than zero if the Asian assets were spun out tax-free, according to The Wall Street Journal.

Not all estimates of the worth of Yahoo's core business are zero. Cantor Fitzgerald analyst Youssef Squali valued Yahoo's core business at $3.9 billion, not including cash, in an October research note. Pivotal Research analyst Brian Wieser pegs the segment's worth at $1.9 billion, cash aside.

Still, the uncertainty around Yahoo's core business has been no help in boosting the YHOO stock price. All that work has gone to the company's stake in Alibaba.

That's why Yahoo is under pressure from major shareholder Starboard Value LP to sell its Internet business. The activist investor is also pressing Yahoo to halt the Alibaba spin-off.

Activists Raise Concerns Over Yahoo Stock Price Future

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"If you stay on the current path, we believe the potential penalty for being wrong is just too great," Starboard wrote in a mid-November letter sent to Yahoo.

The potential penalty Starboard referred to is a massive tax bill for Yahoo shareholders.

Starboard initially supported Yahoo's plan to sell its Alibaba stake. But that was before the IRS denied Yahoo's request for a private letter ruling on whether the Alibaba spin-off would be considered tax-free. Going forward without the IRS tax-free status approval raises the risk the agency could challenge the spin-off in a future audit.

It also means shareholders could be responsible for as much as $9 billion in taxes from the Alibaba spin-off.

As the Yahoo board weighs a sale and/or a spin-off, the group will also likely decide the fate of Yahoo CEO Marissa Mayer.

What's Next for Yahoo's Mayer

Mayer, a former Google executive, took the helm at Yahoo in July 2012. During Mayer's 13-year stint at Google, she led the Google Earth, Gmail, and Google News teams, and is credited with helping create the company's celebrated search page.

Without question, turnarounds are difficult. But during Mayer's three years at Yahoo, the company's core business has dwindled.

Upon Mayer's arrival in 2012, Yahoo sales totaled $4.5 billion. In 2014, the tally was $4.4 billion. Yahoo's slice of digital ad spending worldwide is expected to dip to 2.0% in 2015. That's down from a 3.4% share in 2012, according to eMarketer Inc.

In October, Yahoo announced it was writing off $42 million that it had wasted on a doomed venture into original video programming.

The only value in the Yahoo stock price comes from the company's stake in Alibaba. But even with Wednesday's healthy rally, the Yahoo stock price is down 28.67% year to date.

Should Yahoo put its core business up for sale, interest is likely to come from technology companies and private equity firms. But a buyer of Yahoo's Internet business would have to navigate the headaches that come with its Alibaba stake.

Presently, there are no clear buyers.

For now, this is not a good stock to own, as the future of its business and value to shareholders remains uncertain.

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