Post Yahoo Spin, Alibaba May See New Vigor

In the end, Yahoo may be remembered for what it might have been, but for the missteps. The latest news that the company is pursuing “strategic alternatives” for its core Internet business, while also sawing away 15 percent of its workforce, hints at last resorts. The implication is that beyond those efforts, the company will be up for sale.

One tenacious — perhaps some would say stubborn — decision comes as Yahoo said it would spin out its stakes in Alibaba and Yahoo Japan, which had been telegraphed before and at this early stage in 2016 still seem to be happening this year. But how will Yahoo separate itself from the eCommerce giant – and how to do so surgically when so much of the parent’s stock market value resides in those Internet properties?

The spin-off had been a live wire of hope for Yahoo headed into the end of 2015, only to be shelved in December as ideas of spinning off Alibaba into a separate holding were dashed against the rocky shores of tax liabilities. Though the reverse spin-off may dominate corporate action now, the result remains the same, with Yahoo likely to come under investor microscopes. For now, the question remains what Yahoo’s ownership of 15 percent in Alibaba really means.

The common stocks of both companies trade in lockstep, which implies that they are both viewed as being inextricably tied together. Once the spin-off is complete, both companies get to be judged on their own merits. And that could be a benefit to Alibaba.

The shares currently trade below their IPO price, which implies that investors do not see a reasonable floor in place yet, judging on fundamentals or technical analysis. The fact remains, though, that with a sizable injection of new shares into the marketplace, there would still be some downward pressure on the stock at least initially. But looking again – owning Alibaba is a play on owning China, and specifically eCommerce in China.

After all, Alibaba has roughly 400 million buyers transacting across its marketplaces, and with enough room to run for eventual, and even greater, scale, with an eCommerce penetration of roughly 10 percent of total sales. The slowdown in China’s economy may be inevitable, and even protracted, but even against that backdrop, a true change in how people search for goods and services, choose them and ultimately buy them is underway.

The manufacturing or industrial sectors may be bumpy ones, but in China the consumer still proves resilient. Even as Yahoo may be viewed through a clearer prism, so too will BABA, possibly to the latter’s benefit.