Yahoo's shareholders sent the company's stocks soaring 7.5 percent following Yahoo CEO and president Marissa Mayer's announcement that the company plans to create a tax-free spinoff company that will distribute Yahoo's billion-dollar Alibaba shares to its current investors.

The company's stocks went as much as $51.76 in after-hours trading following Mayer's announcement during the first quarter's earnings call on Tuesday, Jan. 27, giving Yahoo a total market capitalization of $47 billion.

The positive response from investors is overwhelming, especially considering the fact that revenue for the fourth-quarter remained flat at a profit of 30 cents per share on $1.25 billion revenue, just slightly higher than analysts' prediction of 29 cents per share on $1.18 billion.

The spinoff, which Yahoo expects to be completed by the end of the year, will create a new publicly traded company, given the unimaginative name of SpinCo as a "legacy, ancillary" business, which will own Yahoo's 384 million Alibaba shares worth $40 billion. This will be distributed to Yahoo's shareholders in proportion to their shares, according to Yahoo.

"Through share repurchases to date, we have returned approximately $9.7 billion of proceeds from Alibaba," Mayer said. "Post-spin, using the closing price for Alibaba as of Jan. 26, we will have returned nearly $50 billion of value to our shareholders."

The spinoff allows Yahoo to dodge a massive tax bill it would have paid had it decided to simply sell the shares. That would have left the company with only $24 billion to return to its shareholders.

"It's kind of hard not to view it as an unadulterated positive," said Mark Mahaney, an analyst at RBC Capital Markets. "This was the single biggest issue raised by activists."

Mahaney is referring to Starboard Value, a hedge fund activist that has repeatedly called for Mayer to announce a spinoff of Yahoo's Alibaba shares, in addition to including Yahoo's $7.3 billion share in Yahoo Japan, a joint venture with Softbank, and proposing a merger with AOL, of which Starboard is also an investor.

Although a spinoff of Yahoo Japan could be more complicated given the shared operations and intellectual property, Yahoo said it will eventually do the same with its 36 percent shares in Yahoo Japan.

With the Alibaba shares now out of the way, investors will have a clearer picture of exactly how much Yahoo's core business is really worth. The 15.4 percent stake in Alibaba alone is said to account for nearly 85 percent of Yahoo's entire valuation.

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