Spring Cleaning: Yahoo Poised For A Big Move

| About: Yahoo! Inc. (YHOO)

Investors are applauding Yahoo's (NASDAQ:YHOO) recent Spring cleaning efforts as unloved CEO Scott Thompson has been forced to step down and a deal to sell a large stake in the Alibaba Group back to the company is now set for Monday. Yahoo and Alibaba Group Holding Limited (China's largest e-commerce provider), Monday announced they have entered into a definitive agreement for a staged and comprehensive value realization plan for Yahoo's stake in Alibaba.

The first step of the new agreement is the repurchase by Alibaba of up to one-half of Yahoo's stake, or approximately 20% of Alibaba's fully diluted shares. The purchase price will be based on a valuation of Alibaba to be established through equity financings that Alibaba intends to undertake to finance the transaction, subject to a floor valuation of approximately $35 billion. At the minimum price and assuming the initial repurchase of the full 20% stake, Yahoo would receive from Alibaba consideration of approximately $7.1 billion, composed of at least $6.3 billion in cash proceeds and up to $800 million in newly-issued Alibaba preferred stock.

The agreement also establishes a framework for Yahoo to monetize its remaining interest in Alibaba in stages. First, at the time of an initial public offering (IPO) of Alibaba in the future, Alibaba will be required either to repurchase one-quarter of Yahoo's current stake at the IPO price or allow Yahoo to sell those shares in the IPO. Second, following such an IPO, Yahoo has registration rights and rights to marketing support from Alibaba to enable Yahoo to dispose of its remaining shares, at times of Yahoo's choosing following a customary lock-up period.

For Yahoo, the finalized agreement provides for a staged exit over time, balancing near-term liquidity and return of cash to shareholders with the opportunity to participate in future value appreciation of Alibaba. Yahoo intends to return all of the after-tax cash proceeds to shareholders following the closing of the transaction. While the form of the return of capital to shareholders has not yet been finalized, Yahoo's board has increased Yahoo's share buyback authorization by $5 billion concurrently with this transaction. The transaction is expected to close within approximately six months.

New interim CEO Ross Levinsohn has not been involved in the Alibaba deal in any significant way. But as luck and timing will show, he will most definitely benefit from its halo effect, especially given that it will likely boost Yahoo shares as May comes to a close.

Outside of the, still wet ink on the page, Alibaba deal, Yahoo shareholders seem to be excited about the departure of former CEO, Scott Thompson. In the first trading day after Thompson stepped down - Yahoo shares ticked up. Not only were investors applauding the termination, but the frustrated masses were also excited to learn that Yahoo is claiming 'cause' for Thompson's dismissal, says All Things D. This recent development implies that Thompson will not be eligible for a large separation package. While a select few sort out the Thompson mess, Yahoo is quickly moving forward by replacing Thompson with Ross Levinsohn as interim CEO, and also accepting Third Point's board nominations. Renowned Internet analyst, Henry Blodget, has gone on record to say "This is the best thing to happen to Yahoo in years."

In addition to shedding a former CEO and Alibaba stakes, analysts and shareholders alike are hoping that Yahoo continues to trim the fat to streamline the company for future growth. We're not just talking about cutting a few jobs here and there. The ideal scenario would see Yahoo pull all its acquisitions from the last decade out of the closet to figure out what to keep, what to sell and what to pretend like it never happened. If an internal group or service offering does not pair nicely with one of Yahoo's core publishing platforms such as sports, finance or news - make it go away.

Unlike in years past - just having massive properties to sell to advertisers is not the game anymore. Unless you absolutely own the niche you are going after, advertisers today expect much more. For example, both Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) entice major advertisers with better engagement to direct sales and social hooks. While Yahoo lags in these areas, it does have another, as yet, untapped advantage - the big "C" …commerce.

Before former CEO, Thompson, left Yahoo, he was able to set several new commerce initiatives in motion based on his years of experience as the former president of eBay's PayPal unit. Thompson had told his staff that by 2014, one-third of Yahoo's revenue should come from e-commerce. Besides hiring away some of his staff from PayPal, sources said before Thompson stepped down, he was eying payments technology to buy and even leveraging current Yahoo properties to grow this offering.

With payment technologies on the former CEO's radar, Thompson was also a big believer in Yahoo's customer data stores. On Monday, Yahoo launches Genome, an advertising technology solution that takes advantage of the company's Interclick purchase and Yahoo's ad inventory deal with Microsoft (NASDAQ:MSFT) and AOL (NYSE:AOL).

With a revamped management team, crisp dollar bills from the Alibaba deal and new service offerings coming to market - Yahoo appears poised to make a big move.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.