Yahoo will spin off its stake in Alibaba Group to form a new investment company, placating shareholders who wanted more value from Yahoo's share in the Chinese e-commerce giant.
The investment company, SpinCo, will own all of Yahoo's remaining 384 million shares of Alibaba stock, valued at US$40 billion based on the January 26 closing price, Yahoo announced.
The stock will be distributed pro rata to Yahoo shareholders, resulting in SpinCo becoming a separate publicly traded company, Yahoo said.
SpinCo will also own a "legacy, ancillary Yahoo business," Yahoo said, the name of which it did not disclose.
Spinning off Yahoo's stake in Alibaba could help get more shareholders on CEO Marissa Mayer's side as she tries to turn around the struggling Internet company. Yahoo shares were trading at around $US51.66 in after-market hours on Tuesday, up nearly 8 per cent.
After the spinoff, Yahoo will continue to operate its core business and hold its 35.5 per cent share in Yahoo Japan, Yahoo said.
News of the spinoff was announced alongside Yahoo's 2014 fourth quarter results. Revenue dropped by about 1 per cent compared to the fourth quarter of 2013. Net earnings plummeted from $US348 million to the $US166 million.
Much of Yahoo's current market capitalization of $US46 billion comes from its stake in Alibaba and Yahoo Japan.
"Throughout my tenure with the company, we have worked tirelessly on a tax-efficient alternative that would maximise the value of our Alibaba investment for our shareholders," Yahoo CEO Marissa Mayer said in the company's announcement. "A tax-free spin off accomplishes this and delivers value directly and exclusively to our shareholders," she said.
The composition of SpinCo's independent board of directors and its management team will be announced prior to the close of the transaction, Yahoo said. The transaction is expected to be completed by the end of 2015, in the fourth quarter, after the expiration of the one-year lock-up agreement on the Alibaba shares.