The Alibaba shares are worth valued at roughly $40 billion.
Shares of Yahoo rose about seven percent to $51.45 in after hours trading on Tuesday, following the tax-free spinoff announcement and earnings which just beat analysts forecasts even as its revenues slightly lagged estimates.
Selling the Alibaba stake could pressure on Yahoo Chief Executive Marissa Mayer to make quicker progress in strengthening Yahoo’s struggling media and advertising business.
Shareholders feel that Yahoo and its stake in Alibaba would be worth more separately, as long as the Alibaba shares are not subject to the standard 35 percent tax rate that would be incurred from selling the shares.
Yahoo is worth about $45 billion which includes its Alibaba stake of nearly $40 billion, meaning the current Yahoo share price assigns little value to the core business. Some investors believe the email, website and other operations are worth between $7 billion and $8 billion.
Mayer promised investors that the company’s display advertising revenue, which declined 4 percent in 2014, would return to growth this year. But the company’s forecast for revenue in the first quarter implied continuing problems.
Yahoo said that revenue, excluding fees paid to partner websites in the first quarter, would range from $1.02 billion to $1.06 billion, compared to the $1.09 billion last year.
Yahoo said its board of directors has authorized a plan to spin off the stake, tax-free, into a newly formed independent registered investment company. The stock of the company will be distributed pro-rata to Yahoo shareholders and the transaction is expected to close in the fourth quarter of 2015, Yahoo said.
The new entity will include Yahoo’s 384 million shares in Alibaba as well as an unspecified “legacy, ancillary” Yahoo business, the company said.
Yahoo’s revenue, excluding fees paid to partner websites, declined 1.8 percent year-on-year in the final three months of 2014 to $1.18 billion, just shy of Wall Street expectations.