Yahoo announced Tuesday it is spinning off its Yahoo Small Business unit as part of a transaction to hand over to shareholders in a tax-free manner its 15 percent stake in China’s Alibaba, valued at roughly $40 billion.

According to’s Digits Blog, Yahoo’s spin-off of shares is designed to save investors billions of dollars on taxes. However, the transaction requires Yahoo to jettison a part of its operating business so that, at least for tax purposes, the new entity includes an “active trade or business.”

Yahoo Small Business sells e-commerce tools, domain names, web hosting and local listing services to more than 1.5 million paying customers. (See list below.) A version of the service has been around since 1998, when Yahoo purchased Viaweb, a startup started by YCombinator founder Paul Graham. Last year, Yahoo Small Business generated about $50 million in earnings (before interest, taxes, depreciation and amortization) according to information shared last week during the company’s quarterly earnings conference call.

While early coverage of the planned transaction is focused on its tax strategy, there is some operational logic to spinning off the entity and its holdings of Alibaba stock together. As we’ve examined before, Alibaba’s experience in serving small business markets in other countries–along with it large cash holdings, provide it with plenty of opportunities to grow in the U.S. In addition to its wholesale marketplace, the company has technology platforms (like a cloud service business) serving markets around the globe that will likely head to the U.S. sooner or later.

A company that has such a mountain of cash, 1.5 million existing customers in the U.S. and an intimate financial relationship with Alibaba has lots of strategic options from which to choose.

Yahoo Small Business provides information on ecommerce, webhosting, domains, customer acquisition, including the following:

Related Articles