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Yahoo! Inc. (YHOO) Should Just Drop the Entire Alibaba Spinoff Mess: Starboard

Yahoo Inc (YHOO) Marisa Mayer

Yahoo! Inc. should forget about Alibaba Group Holding Ltd spin-off, and instead focus on selling its troubled Internet businesses. That’s what activist investor Starboard Value LP wrote in a letter sent to Yahoo late Wednesday. The Wall Street Journal was the first to report the news.

Yahoo Inc (NASDAQ:YHOO) Sunnyvale CA

Starboard said that Yahoo’s planned sale of over $20 billion in shares of the Chinese e-com giant is now fraught with the risk of incurring taxes. The latest letter from Starboard represents a drastic change from its stance last year, when it publicly urged Yahoo to fast-track the separation.

Yahoo Sans Search

The IRS has already denied Yahoo! Inc. ‘s request for a private letter ruling on whether the stake sale could be considered tax free. The Internet pioneer said in September that it would go ahead with the spin-off even though the IRS denied its request.

Yahoo expects to close the sale by the fourth quarter ending December 31. By then, if the IRS declines the tax-free status, Yahoo’s shareholders may have to dish out around $9B in taxes.

In the letter, Starboard continues to believe that the spin-off wouldn’t incur taxes. But the hedge fund goes on to add that it no longer feels comfortable with the risk of that outcome happening.

“If you stay on the current path, we believe the potential penalty for being wrong is just too great,” Starboard’s letter said.

Instead, the investor is now pushing through with an idea it had previously floated. Yahoo should keep its stake in Alibaba Group Holding Ltd and Yahoo Japan, and rather sell its original Web properties.  That transaction would also incur taxes. But Starboard reckons the bill would be more than offset by the massive gains in Alibaba shares.

Marissa Mayer’s Troubles Seem to be Mounting

Starboard is turning up pressure on Yahoo! Inc. Chief Marissa Mayer as her efforts to revive the beleaguered firm’s fortunes enter its fourth year. Few signs of progress are visible. Mayer has been trying to position Yahoo as a challenger to Google in Web search and as a threat to Netflix in online video content. Both these projects have cost Yahoo billions of dollars.  But nothing worthwhile, either in revenue or in users, is yet to show up.

On the contrary, over the course of Mayer’s tumultuous tenure, Yahoo’s core business has dwindled. When she arrived in 2012, Yahoo revenue totaled $4.5B. By 2014, that shrunk to $4.4B.

Not just that, Yahoo is fast losing the battle for ad dollars. eMarketer projects that Yahoo’s share of global digital ad spends is expected to drop to 2.0% this year, from 3.4% share in 2012.

Mayer, during last month’s earnings call, signaled Yahoo! Inc. will embrace new strategies to “reset” the company’s focus to fewer areas, and move further into mobile. But most analysts seem skeptical. Time is running out for her.

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