Yahoo on Tuesday said it would spin off its remaining Alibaba stake in a tax-free deal. The stock jumped more than 7 percent after the announcement.
Yahoo's 384 million shares of Alibaba, valued at $40 billion, will be wrapped into a newly formed independent entity, SpinCo.
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The stock of the new company will be distributed pro rata to Yahoo shareholders, resulting in SpinCo becoming a separate publicly traded company, Yahoo said in a statement.
"Post-spin, using the closing price for Alibaba as of Jan. 26, we will have returned nearly $50 billion of value to our shareholders," CEO Marissa Mayer said.
"This level of capital return is historic, especially for a company of our size."
The deal is expected to close sometime in the fourth quarter of this year.
The Internet giant also reported fourth-quarter earnings of 30 cents per share, down from 46 cents a share in the year-earlier period. Revenue decreased to $1.18 billion from $1.20 billion.
Analysts had expected the company to report earnings of 29 cents a share on $1.19 billion in revenue, according to a consensus estimate from Thomson Reuters.
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Excluding traffic acquisition cost, display revenue contracted 5.5 percent, year over year, to $464 million. Revenue generated from search rose modestly, year over year, to $462 million.
Much of Yahoo's mobile revenue comes from search ads, an area that is becoming more competitive as companies like Yelp, Amazon and TripAdvisor continue to fragment the market, according to research firm eMarketer.
Looking forward, the company forecast current-quarter revenue of between $1.02 billion and $1.06 billion. That's lower than the $1.10 billion Wall Street currently expects.
Yahoo has discontinued more than 60 products and services over the past two years in an effort to "focus on the offerings that matter most" to its users, the company said in December.
Uncertainty around Yahoo's plans for the stake and how the market could react to the potential news was reflected in the options market.
Options data on Monday showed traders were expecting a 8 percent swing in the stock the after earnings announcement. That's nearly twice as much as shares have moved on average after reporting earnings.
Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.