NEW YORK (TheStreet) -- Yahoo! (YHOO CEO Marissa Mayer Tuesday took the one action open to her to create the most value for shareholders, but I don't expect it will be enough to placate hedge fund Starboard.
Mayer announced a plan to spin off Yahoo's 384 million shares of Alibaba (BABA - Get Report) into a separate stock later this year. Eventually, Yahoo! will be able to sell that stake without paying taxes on it. That stake alone is worth $40 billion, and Yahoo! ended Tuesday's session with a market capitalization of $45 billion, so that's a big deal.
Even so, Starboard likely will continue to push for more changes. My guess based on the hedge fund's most recent letter is that it will (1) push for a spinoff of the 35% Yahoo! Japan stake and (2) push for Yahoo! to cut costs in the core business.
Yahoo!'s stake in Yahoo! Japan is worth about $7 billion untaxed today. That means there's approximately another $3 per share in value to be created from such a spinoff. Yahoo!'s CFO, Ken Goldman, was asked why the company couldn't have done a Yahoo! Japan spinoff at the same time as the Alibaba spinoff. He explained he just wanted to get something done first and then focus on the second outcome. His responses weren't very convincing. There's no reason Yahoo! had to wait.
My best guess is that Yahoo! management is thinking there's a good chance SoftBank (which also owns a piece of Yahoo! Japan) might want to buy Yahoo's core business with its Yahoo! Japan stake later this year.
The news of the planned SpinCo transaction distracted from what was a very disappointing quarter for Yahoo!'s core business, in what is the company's biggest quarter of the year. Sunnyvale, Calif.-based Yahoo! reported adjusted earnings of 30 cents per share on $1.18 billion in ex-TAC (traffic acquisition costs) revenue, compared with estimates of 29 cents a share on $1.19 billion in revenue. Overall revenue for the quarter was down 2% year over year, as was display revenue, which was down 5% year over year to $464 million. Search revenue, however, was flat during the same period, at $462 million.
Yahoo!'s earnings before interest, taxes, depreciation and amortization continue to melt like a popsicle in the sun. And yet Yahoo! continues to employee about 15,000 full-time and contract workers around the world. Starboard should be able to make hay about this disconnect. How can Mayer continue to boast about being such a good "steward of capital" when she obstinately refuses to reduce the headcount to fit the business she oversees? At least 8,000 employees could be let go immediately.
It will be interesting to see what comes next in the discussion about merging Yahoo!'s core business and AOL (AOL . Starboard has pushed for this previously, but Mayer went out of her way Tuesday in an interview with The Wall Street Journal to deny an interest in doing this.
From Mayer's perspective, it's likely she clearly believes the SpinCo news will help her fend off a proxy fight from Starboard. But her comments on the earnings call Tuesday relating to the Apple (AAPL Safari search deal prospects were very interesting. She went out of her way to say that Yahoo! would compete hard to win this business away from Google (GOOG - Get Report) on the iPhone this year. Her language on the call seemed particularly confident. It would be odd for her to speak that way unless she was very confident she will get it.
Here's another bit of idle speculation: Mayer probably is well aware now -- 2.5 years into the job -- just how difficult it is going to be in the long term to turn around Yahoo!'s core business. I suspect her thinking is (1) win the iPhone deal with Apple (AAPL and (2) sell the core business to SoftBank or another suitor. Alibaba could then buy the SpinCo.
It would likely all be done at a much higher price than $50 a share. She would ride off into the sunset as a hero. She could say she arrived when the stock was $15 a share and left when it was $80.
That's leaving your shareholders in a better place than you found them -- even if it's mostly to do with Alibaba and not the core business.