You will be redirected back to your article in seconds

Why Yahoo Is Weighing a Sale: Death and Taxes

Reports that Yahoo may be weighing a sale of its core business assets sent the company’s stock up Wednesday, but they also caused for some confusion among industry watchers. Yahoo has been struggling for years. So why pursue a sale now all of a sudden?

The answer is twofold: the company is dealing with an immediate tax issue, but it’s also facing a long-term shift in the way advertising is sold.

One pressing matter before Yahoo’s board this week is whether to continue with the planned spin-off of Yahoo’s stake in Alibaba. At one point, Yahoo owned 40 percent of the Chinese internet company, thanks to an investment it made 10 years ago. Back then, Yahoo invested $1 billion in Alibaba, and also handed the company the keys to Yahoo China.

That original investment has already been a goldmine for Yahoo, which reduced its stake in Alibaba, selling off shares and bringing in billions in the process. In January, Yahoo’s board decided that it was going to sell of its remaining stake in Alibaba, valued around $30 billion.

This decision was initially backed by investors. But last month, activist investor Starboard Value reversed its stance on the Alibaba stake sale, and suggested the company should bid farewell to its internet business instead.

The reason: Starboard doesn’t want to pay taxes on those Alibaba shares. Yahoo has been planning to structure the divestiture in a way that could be tax-free, but the IRS hasn’t been playing ball, declining a request by the company to state that there won’t be a bill in the end, after all.

The difference between paying taxes and selling those Alibaba shares tax-free? A whopping $9 billion, which Starboard and others would like to keep. It’s also a magnitude more than Yahoo’s core business is worth, which is why selling the U.S. homepage and other assets and keeping the China investment may make sense on paper.

But there’s one other factor that’s at stake in all of this: The slow death of display advertising. Yahoo is primarily an advertising business, selling banner ads across its properties, including the still immensely popular Yahoo homepage, and increasingly monetizing video with advertising as well. For a long time, Yahoo could attract premium brand dollars for premium online real estate

However, the way advertising is being sold is shifting towards a programmatic approach, with algorithms, and not agencies deciding where ads are placed and dollars are spent. The slow death of traditional display advertising spells trouble for Yahoo, as Pivotal Research Group senior analyst Brian Wieser remarked in a note sent to investors yesterday.

“Yahoo is hit hard because it historically was able to generate high pricing for its inventory,” he noted, adding: “However, in a programmatic era, efficient audience aggregation is not unique to Yahoo.”

Wieser also noted that video ads are no magic bullet for Yahoo. “To some degree Yahoo can retain “share of wallet” by adding more video inventory to its mix of ad units (as video units typically command higher prices vs. display) but this opportunity may be limited as every other publisher adds more and more video inventory to their properties,” he wrote. Add to that the fact that Yahoo severely overestimated its ability to get TV-like ad dollars for shows like “Community,” and you can see why some investors may be more than ready for Yahoo to sell.

Of course, that still doesn’t mean that there will be a buyer, and a complete sale of all essential assets may not be the only option. The company may just decide to go forward with the sale of its Alibaba stake, eat any potential tax bill, and restructure next year. But other than death and taxes, there’s one more thing certain for Yahoo: The company’s board will have to make some big decisions. Maybe not this week, but definitely in the coming months.

Popular on Variety

More Digital

  • Ronan Farrow book Catch and Kill

    Ronan Farrow Inks Podcast Series Deal for 'Catch and Kill' (EXCLUSIVE)

    Ronan Farrow is launching a podcast offshoot of his best-selling book “Catch and Kill.” Slated to premiere in November, “The Catch and Kill Podcast With Ronan Farrow” will feature new audio material and interviews with people Farrow interviewed about allegations involving sexual misconduct of media industry figures including Harvey Weinstein and Matt Lauer — and [...]

  • Katie Couric Sheryl Sandberg

    Katie Couric Steamrolls Sheryl Sandberg in Roving Vanity Fair Summit Interview

    Sending a jolt through a luxurious and excessively polite afternoon in Beverly Hills, veteran journalist Katie Couric delivered a relentless series of hardball questions to Facebook chief operating officer Sheryl Sandberg on Tuesday. Speaking in conversation at the sixth annual Vanity Fair New Establishment summit at the Wallis Annenberg Center for the Performing Arts, Couric’s [...]

  • Parker Posey

    Parker Posey Stars in 'Hunted,' First Podcast From Dick Wolf and Endeavor Audio (EXCLUSIVE)

    Parker Posey will star in prison-break thriller “Hunted,” the first podcast from Endeavor Audio and Dick Wolf’s Wolf Entertainment. Posey (“Dazed and Confused,” “Scream 3,” “Superman Returns”) will star in the scripted podcast series alongside Brandon Scott (“13 Reasons Why,” “Dead to Me,” “Grey’s Anatomy”). In the eight-episode show, U.S. Deputy Marshal Emily Barnes (Posey) [...]

  • Snapchat

    Snapchat Grows to 210 Million Daily Users, Surpasses Q3 Revenue Expectations

    Snapchat is growing again, and getting better at monetizing all those eyeballs: The service ended its fiscal third quarter with 210 million daily active users, compared to 203 million at the end of Q2, its corporate parent Snap Inc. revealed as part of its earnings release Tuesday afternoon. Snap Inc. generated some $446 million revenue [...]

  • Fire TV News

    Amazon Launches Ad-Supported News Video App

    Amazon officially announced its long-rumored ad-supported news video service Tuesday. The new service will be available on Fire TV devices as well as Fire tablets, and rely on videos from publishers including CBS News, Reuters, Huffington Post, Bloomberg, People, Cheddar and others. News coverage served up through the app includes livestreams as well as on-demand [...]

  • Marvel-SiriusXM-podcasts

    Marvel Creating 'Substantial' Number of Exclusive Podcasts for SiriusXM

    Marvel’s Wolverine, Hawkeye, Black Widow and Star-Lord — and potentially more characters down the road — are getting their own podcasts on SiriusXM and Pandora. SiriusXM and Marvel Entertainment announced a multiyear pact under which Marvel will create a “substantial amount” of exclusive podcasts for SiriusXM and Pandora, including both scripted and unscripted series and [...]

More From Our Brands

Access exclusive content