Yahoo! Inc. (NASDAQ:YHOO) is busy calming the nerves of its investors, who have possibly misinterpreted a statement from an Internal Revenue Service (IRS) official, that indicated the possibility of reviewing IRS spin-off rules. Investors fear that IRS’s actions might upset the company’s spin-off plans out of its stake in Alibaba Group Holding Ltd. (NYSE:BABA) which could cost Yahoo! Inc. billions in taxes.
Following the statement from IRS attorney, Isaac Zimbalist, at a Bar Association conference on Tuesday, that the IRS plans to postpone ruling on new spin-off requests, shares of Yahoo! Inc. dropped 7.5 percent. Shares rebounded on Wednesday as investors seemed to regain confidence in Yahoo! Inc.’s spin-off plans.
On the surface Yahoo! Inc. seems unfazed by rumors that its spin-off plans will be stopped. Yahoo’s statement on the company blog Yahoo.tumblr.com:
“Yahoo understands that the IRS’s statement is not specific to Yahoo’s planned Q4 2015 spin-off of its remaining stake in Alibaba Group and Yahoo Small Business, reflects no change in applicable law, and does not affect previously filed ruling requests. Yahoo filed its pending ruling request with the IRS in Q1 2015. Yahoo continues to work toward completing the planned spin-off in Q4 2015.”
Investors seemed calmed by Yahoo! Inc.’s clarification that it has already filed a ruling request seeking approval of its plans to form a new company out of its $33 billion worth stake in Alibaba and Yahoo Small Business. As a result of this submission, Yahoo! Inc. is expected to save $12-$15 billion in tax following the completion of the spin-off in the fourth quarter of 2015.
Earlier in January, Yahoo’s CEO, Marissa Mayer, announced the spin-off plans following pressure from investors, who demanded their share of stake in Alibaba’s sale proceeds. So far, Mayer has been unable to turn around the core business of the company, which involves revenue generation through selling ads. Hence, that leaves investors hooked to Alibaba which has turned out to be a cash cow for the company.
Mayer is also under constant pressure to monetize the company’s other assets that include its stake in Yahoo Japan which is jointly owned by SoftBank. Mayer had hinted during the last earnings call that the company will identify opportunities around its 35.5% stake in Yahoo Japan, which is worth $9 billion.
Meanwhile, several law experts and analysts have already raised red flags around spin-offs like this, which can become a difficult endeavor, particularly when the objective is to sell the newly formed entity. Such warnings are disconcerting for Yahoo! Inc. investors, who are already staring at the probability of Alibaba buying back the proposed spin-off company, but for the time being seem content to wait and see.
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