Yahoo Inc will be a fraction of its size should the company spin off its remaining stake in Alibaba Group Holding Ltd, making it a takeover candidate for SoftBank Corp or private equity firms.
Marissa Mayer, chief executive of the $46 billion company, is expected to give an update next week about whether Yahoo will sell its Alibaba shares and how it will avoid paying taxes on the move.
With the Chinese e-commerce company accounting for most of Yahoo's value, shareholders would be left holding a United States-based Internet advertising and search business worth about $5 billion to $8 billion, according to analysts' estimates compiled by Bloomberg.
Yahoo will also still have a roughly $8 billion stake in Yahoo Japan Corp.
SoftBank could buy Yahoo to increase its own Yahoo Japan stake, though it is unclear how much the Japanese wireless carrier would be willing to pay for a US business that is under pressure.
A private equity suitor could be lured by the cash Yahoo's operations generate.
Or Alibaba could always just take over Yahoo and retire the Alibaba stock that Yahoo owns, gaining some exposure to the US technology market.
"Marissa Mayer has to make a very big decision, and it will either involve splitting the company up or doing nothing," Neil Doshi, a San Francisco-based analyst for CRT Capital, said. If it casts off the Alibaba stake, "the acquisition size becomes much more manageable, and we think Yahoo could become a much more compelling target."
Mayer said in October that she will report back to shareholders by the next earnings release on Jan 27 with an update on its plans for the rest of its Alibaba holding.
"Many have pointed out the value accretion that would occur if this final tranche were to be taxed upon sale at a lower rate than the previous sales," Mayer said at the time. "We are acutely of aware of this. We have the best tax experts in the country, working intensively on structures to maximise the value to our shareholders of our remaining stake in Alibaba."
Yahoo owns about 384 million shares of Alibaba, which it cannot sell until September, the one-year anniversary of Alibaba's US initial public offering.
The stake is worth about $40 billion, while its Yahoo Japan stake is valued at about $8 billion.
That means investors buying Yahoo's stock now get to own the core US business for free and are not giving the company credit for its roughly $7 billion of net cash.
"The US business is still cash generative－it's not worth nothing," said Brett Harriss, an analyst for Gabelli & Co in New York.
Tokyo-based SoftBank, which controls wireless carrier Sprint Corp, has been looking for more US investments. SoftBank and Yahoo also are the biggest shareholders in Yahoo Japan.
Similarly, Tencent Holdings Ltd., China's second-largest Internet company, could be a logical suitor for Yahoo as it tries to expand in the US, according to Doshi.
With Yahoo gaining mobile-advertising market share, it could even be a compelling target for Microsoft Corp as the $379 billion software provider falls behind in mobile Internet, Doshi said.
Starboard Value LP, the activist investor putting pressure on Yahoo's management and board, has said that Yahoo should explore a merger with AOL Inc, estimating as much as $1 billion of cost savings from such a transaction.