Yahoo! Inc. has suffered another blow as its Alibaba stake continues to alternate between being a blessing and being a curse. Breaking news holds that the IRS has declined to rule on Yahoo’s request to spin-off its Alibaba stake in a tax-free deal that would return money to shareholders. Yahoo’s has seen is core ad-business suffer over the last couple of years and its Alibaba stake is one of the few bright spots that keep investors hopeful about the prospects of the stock.
Yahoo decided to spin-off its Alibaba stake largely to preserve the value of the stock. Alibaba might face downward pressure if the firm decides on an outright sale of its stock. Secondly, the proposed tax-free spin-off would allow the board to redistribute the Alibaba shares to its investors without getting a tax bill. Now, an SEC filling from the firm holds that “the IRS indicated that it had not concluded that the proposed spin-off transaction was taxable and therefore was not ruling adversely on the request.”
Alibaba sinks Yahoo
When Yahoo revealed plans to spin-off its Alibaba stake, the stake was valued somewhere around $40B. The stock of Alibaba then hit troubled waters, the stock has lost more than 41% in the year-to-date period – (Yahoo has also lost 40% in the YTD) and now, Yahoo’s stake in Alibaba is worth only about $23B. Following the news of the IRS ruling, the shares of Yahoo lost 2.15% to close at $30.90 in yesterday’s session and the stock has lost another 2.43% in premarket trading to open around $30.15.
If the board goes ahead with the spin-off and it turns out that it is not tax-free, Yahoo shareholders won’t have anything to show for the deal. The New York Times reports that Yahoo will itself get a tax bill of about $7B when its gives its shareholders AaBaCo shares. A doctrine known as the “repeal of General Utilities,” section 311(d) of the tax code imposes tax liability on a corporation when it distributes appreciated property to its shareholders”.
Secondly, Yahoo shareholders will only get AaBaCo shares and not cash, but the IRS will require them to pay taxes on the news shares that they received. Now, Alibaba’s stock is in a downtrend some shareholders would rather sell the AaBaCo shares for whatever it brings to clear the tax bill instead of pulling cash from their pockets to pay the bill.
Hedge Fund has a workable plan for Yahoo
A little over two weeks ago, Eric Jackson who manages a hedge fund that holds a stake in the firm said that Yahoo needed to pivot if it wants to remain relevant in the tech space. He maintained that it’s core business is worth about only about $2.2B and that its stakes in Alibaba and Yahoo Japan were the reasons the firm had a $29.73 market cap. He says, the company is “trying to reinvent itself in the mobile age, it hasn’t been successful. What Yahoo apps do you have on your phone? That’s the problem”.
Now, if Yahoo can’t have a tax-free spin-off of its Alibaba stake, its investors will get less than nothing from the spin-off. The firm might as just well sell the shares normally, pay its tax bills, forget about Alibaba – perhaps sack CEO Marissa Mayer, and then plan a coup against Netflix.