SAN FRANCISCO (AP)--Yahoo is scrapping its original plan to spin off its prized stake in China's Alibaba Group and will instead explore breaking off the rest of its business into a new company.
Yahoo shares gained more than 2 percent in premarket trading.
The change of heart announced Wednesday comes after Yahoo's board met last week to review the proposed Alibaba spin off, as well as CEO Marissa Mayer's stalled attempts to turn around one of the Internet's best-known companies.
Yahoo Inc. said that it now plans to look into how it can spin off all of its other businesses and their liabilities into a new company. That business would be distributed to Yahoo shareholders.
Yahoo Chairman Maynard Webb said in a statement that the company became concerned about the original plan to spin off the Alibaba stake in part because of the market's perception of tax risk.
The meetings Yahoo held last week included a discussion on whether to heed an activist shareholder's call for Yahoo to sell the websites, mobile applications and ad services that generate most of its revenue and recast itself to a holding company for its holdings in Alibaba, a rapidly growing e-commerce company, and Yahoo Japan.
Those Asian investments account for the bulk of Yahoo's current market value of about $33 billion. Investors have concluded that Yahoo's Internet business is worth next to nothing, largely because its ad revenue has been sinking for years even though marketers have been steadily increasing their spending on digital campaigns. Most of those dollars, though, have been flowing to Google and Facebook.
Things were supposed to change when Yahoo lured Mayer, considered a rising Silicon Valley start, away from Google to become its CEO three-and-half years ago. But Yahoo has only showed modest signs of progress during her tenure, despite spending billions on acquisitions and product development.
As Wall Street's frustration with the inertia has mounted, Yahoo's stock has fallen by about 30 percent so far this year.
Mayer had hoped to buy more time with the Alibaba spinoff, which had been set as tax-free shelter for Yahoo's 384 million shares in the Chinese company. That idea pleased investors until the Internal Revenue Service declined to rule that the Alibaba spinoff would qualify for a tax exemption.
That raised the specter of Yahoo being hit with a tax bill of more than $10 billion on an investment currently worth about $32 billion. Despite that possibility, Mayer had been planning to complete the Alibaba spinoff by next month in a reflection of her belied the split would gain tax-free status.
Spooked by the potential tax hit, Starboard Value reversed its initial support of the Alibaba spinoff and last month demanded that Yahoo's board sell the Internet business instead. If Yahoo didn't reconsider the Alibaba plan, Starboard threatened to lead a shareholder mutiny aimed at overthrowing the board next year.
Even before the Alibaba backpedal, Mayer had promised to start off the new year with a reorganization that will jettison Yahoo's least profitable services as part of housecleaning likely to pare Yahoo's payroll from its current size of 10,700 employees.
Despite its financial funk, Yahoo still runs services that attract hundreds of millions of visitors and owns one of the world's best-known brands.
If a reverse spin off is successful, it would need to clear a number of hurdles, including third party consents and shareholder approval.
Shares of Yahoo rose 85 cents, or 2.4 percent, to $35.70 before the market open.
Michelle Chapman in New York contributed to this story.