Yahoo announced Monday it would go ahead with its plan to spin off its stake in Alibaba despite the fact the deal might come with a hefty tax.
New York Times reporter Michael J. de la Merced summed up the company’s news:
Yahoo signaled on Monday that it was willing to risk a fight with the federal government to spin off its 15 percent stake in the Alibaba Group, the Chinese Internet giant.
Yahoo disclosed in a regulatory filing on Monday that its board voted last Wednesday to let the company stick with a plan to spin out its shares in Alibaba into a separate publicly traded company.
The Internal Revenue Service declined to rule that transaction tax-free, a critical reason for using the relatively complex transaction. Simply selling the Alibaba stock could generate a tax bill that analysts have estimated at about $9 billion.
But over the last several months, the I.R.S. has strongly hinted that it would begin cracking down on these spinoffs, which involve fusing a big block of shares with a tiny operating business.
Douglas Macmillan of The Wall Street Journal explained why successfully spinning off the company’s Alibaba ties is important to Yahoo:
Chief Executive Marissa Mayer needs to complete the Alibaba spinoff to quell investors, who are growing impatient with her lack of progress turning around the company’s struggling online-ad business in more than three years at the helm.
Yahoo’s stock gains under Ms. Mayer are largely tied to investors’ growing enthusiasm for its Alibaba stake and the CEO’s commitment to return billions of dollars to shareholders through a spinoff.
Shares in both Yahoo and Alibaba have slid about 45% this year amid a broad selloff in China stocks as investors grow concerned about consumer spending in a slowing economy. The value of the Alibaba stake was worth nearly $40 billion when Yahoo unveiled its spinoff plan in January. It is now valued at about $22 billion.
Yahoo had sought the IRS’s blessing in the form of a private-letter ruling which gives investors assurance a spinoff can be completed. The IRS declined to issue one—in recent years the agency has scaled back its practice of private-letter rulings, only ruling on specific questions that are part of a broader spinoff deal.
Sayantani Ghosh of Reuters explained how the deal’s value has dropped significantly in recent weeks due to raucous Asian markets:
Based on Alibaba’s Monday close of $59.24, Yahoo’s 384 million shares of Alibaba are worth $22.75 billion.
The value of the stake is slightly less than Yahoo’s market capitalization of about $25.98 billion based on 941 million shares outstanding on July 31 and Monday’s close.
Many analysts say Yahoo’s core business is worth close to nothing without its Asian assets.
As of Monday’s close, Yahoo’s shares have declined a little more than 45 percent this year. Alibaba’s shares have fallen nearly 45 percent over the same period.
Investors have closely followed plans for the spinoff, seeing it as a way to unlock value from the company.
Yahoo paid $1 billion in 2005 for a 40 percent stake in Alibaba, in a deal credited to the U.S. company’s co-founder Jerry Yang.
Yahoo, which expects to complete the deal in the forth quarter ending Dec. 31, has been trying to revive its core online advertising business by spending more to get users on its websites.
Analysts and shareholders believe the company and its stake in Alibaba would be worth more separately, as long as the spinoff is not subject to tax incurred from selling the shares.
