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It is the moment Yahoo (Nasdaq: YHOO) investors have been nervously awaiting.

Yesterday, along with the company’s latest quarterly earnings report, Yahoo’s CEO Marissa Mayer announced what the struggling tech company intends do with its massive stake in e-commerce giant Alibaba (NYSE: BABA).

Yahoo will split its entire stake in Alibaba into a separate company, with plans to complete the Alibaba spinoff by the end of this year.

In 2005 Yahoo’s founder and then-CEO Jerry Yang decided to invest in Alibaba. Though the young e-commerce company had only just turned a profit four years prior, Yang’s investment in Alibaba has grown into what is clearly Yahoo’s most valuable asset.

As of yesterday, Yahoo holds 384 million shares of Alibaba stock. The stake is large enough to make up 15.4% of Alibaba’s total shares outstanding and is worth nearly $40 billion. To give you some idea of the importance Mayer’s Alibaba decision for Yahoo shareholders, consider that Yahoo’s entire market capitalization was $46.84 billion at yesterday’s market close.

Shareholders seem to like the plan, as Yahoo stock jumped up 7% in after-hours trading before settling in for a 6.5% gain.

Why the Alibaba spinoff?

Mayer said it best herself in a videotaped statement released along with the announcement. “If sold or transferred through ordinary means, the proceeds would be taxable at approximately 40%.” She went on to say that the tax liability created by a traditional sale would result in a $16 billion tax bill for the company, roughly $16 per share.

The solution? Yahoo’s tax-free Alibaba spinoff. In her video announcement, Mayer laid out the plan with the following graphic.

yahoo-spinoffSource: Business Insider

Essentially, Yahoo is spinning off its entire Alibaba stake as well as another “ancillary business” and retaining both its core operations and its stake in Yahoo Japan. The new company will trade as a completely separate public company.

And if you’re wondering why the move makes sense consider this additional graphic that Mayer used in her video announcement.

Yahoo Split Tax Savings 1.27.15Source: Business Insider

By executing the tax-free Alibaba spin off, Yahoo will be able to avoid $3.31 in taxes. Meanwhile, Mayer pointed to Yahoo management’s successful efforts to avoid a legal requirement to sell more of its stake in Alibaba as part of the company’s 2014 IPO.

Mayer pointed out that she and her team were able to hold onto approximately 122 million additional shares. When you add in the $4.38 billion that those shares have appreciated since Alibaba’s IPO you arrive at $7.7 billion in shareholder value that has been built by Mayer and her team.

Whether or not you attribute the Alibaba spin off and Yahoo’s ability to hold onto the large block of additional shares to Mayer’s effectiveness as a CEO, this seems to me like a very positive result for the young CEO. Based on the pop in shares during after hours trading, it is safe to say that Yahoo investors view this as a positive outcome for themselves as well.

Of course, Yahoo’s earnings report itself was nothing special.

Earnings per share and revenue figures were roughly in-line with analyst expectations and display advertising revenue actually fell compared to the same quarter of last year. The major bright spot I see in the earnings report itself is revenue growth of Yahoo’s mobile advertising unit, rising 22% year-over-year.

That said, the earnings report itself isn’t what investors will focus on. Certainly the Alibaba spin off is the big news and it is, indeed, good news for Yahoo investors.

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Published by Wyatt Investment Research at