Yahoo could become Internet history

After a long struggle to lure people back to Yahoo Mail and its search engine, the trailblazing online service plans to spin off its core business, putting it in a position to be scooped up.

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Richard Nieva
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4 min read

Led by CEO Marissa Mayer, Yahoo is dropping its plans to spin off its stake in Alibaba.

Julie Jacobson/AP/Corbis

A decade and then some past its heyday as an Internet pioneer, Yahoo will spin off its core business after failing to convince people that its products are still worthwhile.

The Sunnyvale, California, company said Wednesday it will scrap its plans to spin off its stake in Chinese e-commerce giant Alibaba, worth more than $30 billion. Instead, it will reverse course and look at "alternative transaction structures" to separate the stake. That approach could make it easier to ultimately sell the spun-off core business.

"Informed by our intimate familiarity with Yahoo's unique circumstances, the Board remains committed to accomplishing the significant business purposes and shareholder benefits that can be realized by separating the Alibaba stake from the rest of Yahoo," Chairman Maynard Webb said in a statement. "To achieve this, we will now focus our efforts on the reverse spin-off plan."

Yahoo's board voted unanimously for the reverse spin-off, but it wasn't the first choice for action because it will take a year to perform and involves more outside parties, CEO Marissa Mayer said on a conference call. Yahoo needs the approval of shareholders, US regulators, Yahoo investor SoftBank and business partners of which there are "too many to name," Chief Financial Officer Ken Goldman said on the call.

A spin-off of Yahoo's Web business might have more symbolic significance than anything else.
The once-mighty trailblazer, founded in 1995 by Stanford University students Jerry Yang and David Filo, is one of the last independent titans of the early Internet. In June, AOL, which helped many people get onto the Internet for the first time through its early dial-up service, was bought by Verizon. Also now just memories of that earlier era are Netscape, Napster and many of the other services that taught us, while stabbing in the dark, how to surf, listen and live online. Yahoo was once the brightest star of the bunch.

The spin-off would also mean the company that Yang and Filo co-founded could be stripped down to an entity that's of more interest to investors than everyday computer users.

Yahoo's homepage though the years

GIF by James Martin/CNET

Of course, it could be argued that most of us largely lost interest in Yahoo a long time ago.

When Mayer, a former Google executive, was named CEO in 2012, she was tasked with turning around the already lumbering company.

To do that, she has tried to remake Yahoo for the mobile era as consumers migrated from PCs to smartphones and tablets. She has refreshed each of its mobile properties, including Yahoo Mail, Weather, Finance and Sports. She has also tried to make the company a premier media destination, hiring well-known personalities such as journalist Katie Couric and acquiring the rights to high-profile shows like the sitcom "Community."

But Mayer hasn't been able to replicate the excitement around products that many of Yahoo's fiercest rivals have been able to ignite. Once one of the most powerful brands on the Web, Yahoo has been overtaken in search and email by Google, and beaten in media by Netflix and Amazon. (Yahoo has acknowledged it never found a way to make money off "Community.") Facebook and even newer players like Snapchat have won over users that Yahoo has coveted for its messaging app.

Brett Sappington, director of research at Parks Associates, said one of Yahoo's biggest mistakes was not making bets in new and innovative areas, as Google and Amazon have.

"In the world of the Internet, which is diverse and incredibly unpredictable, you have to be adaptable and open to change," said Sappington. "Yahoo in contrast really defined their business very tightly."

Watch this: Yahoo's Mayer admits she doesn't use a phone passcode

Yahoo plans to reveal details of strategic changes to its core businesses during its next quarterly conference call. It wouldn't discuss options for selling those businesses.

"We have made no determination to sell the company or any part of it," Webb said.

"We believe that we are tremendously undervalued,
and we think the best path to unlocking that value is by separating the Alibaba assets from our operating businesses and also by turning around the performance of the operating businesses."

Possible buyers for Yahoo's main business could include private equity firms, big media companies and telecommunications companies. On Monday, Verizon Chief Financial Officer Fran Shammo said the wireless carrier would explore buying Yahoo's Internet business if it "makes sense," according to Bloomberg.

Yahoo's revolving door of CEOs (pictures)

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This isn't the first time Yahoo has been caught up in talk of a sale. In a saga that dragged on for months, Microsoft in 2008 bid $44.6 billion on the company, though then-CEO Yang balked.

Yahoo's planned Alibaba spinoff was designed to let Yahoo off the hook for a tax bill of billions of dollars. But in May, questions began to pop up about the spinoff, after the Internal Revenue Service proposed new rules around taxing corporate spinoffs.

Activist investor group Starboard Value, which owns less than 1 percent of Yahoo, was originally behind the spinoff but in November told Mayer to jettison Yahoo's Internet business instead.

Max Levchin, co-founder of PayPal and the first person named by Mayer to the Yahoo board, told the company Friday that he was resigning as a director. Yahoo said Levchin is stepping down to focus on his online lending startup, Affirm, and has dropped nearly all of his other board commitments.

Yahoo's chairman, meanwhile, went out of his way Wednesday to defend Mayer's performance.

"The board has complete confidence in the management team and the leadership of Yahoo and believes it's making important strides toward its transformation," Webb said on the conference call.

Mayer tooted her own horn, too.

"Today, I'm leading very different company from the one I started at in July of 2012 -- one with better products, improved partnerships, more focused employees, dramatically more mobile users and mobile revenue, more modern advertising tech to serve our clients' needs," she said. "We're taking further steps to tighten our focus and prioritize our investments to drive growth."

Update 7:10 a.m. PT: Remarks from the conference call were added. CNET's Rochelle Garner contributed to this report.