Ma_Mayer_Split - H 2015
AP ImagesThis story first appeared in the July 31 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
Yahoo is proceeding full steam ahead toward a spinoff of its $32 billion stake in Alibaba into a separate, publicly traded investment company — as long as the IRS doesn’t intervene to derail CEO Marissa Mayer‘s bold plan.
According to Yahoo’s July 17 SEC filing, the spinoff is to be called Aabaco Holdings, and its assets will consist of 384 million shares of Alibaba — representing a 15 percent stake in Jack Ma‘s Chinese Internet firm — as well as Yahoo Small Business, an entity that services Internet merchants. The inclusion of the latter helps Yahoo make the case that the transaction should be considered a tax-free spinoff rather than a stock sale subject to capital gains taxes, which would be formidable considering that a decade ago Yahoo paid just $1 billion for a 40 percent stake in Alibaba, now a $208 billion company.
The IRS seemed to be on board when Yahoo first announced its intentions for the spinoff in January, but in the new filing the company acknowledged that the government tax agency is “reconsidering its ruling policy.” Yahoo could still choose to go through with the spinoff even if the IRS doesn’t stipulate it will be tax-free, but shareholders — and Mayer’s already shaky reputation — could take a hit.
Since being named CEO of Yahoo three years ago, Mayer, now 40, has been under pressure to restore the pioneering Internet company to its former glory. Wall Street isn’t yet convinced Yahoo is worth much more than its Alibaba stake, which many believe has been propping up the company’s missteps for years. As of July 20, Yahoo’s market capitalization was $37 billion, just $5 billion more than the value of its remaining Alibaba shares.
Plus, Yahoo stock routinely trades practically in tandem with Alibaba, further underlining the importance the Street ascribes to the investment. Since January, Alibaba’s shares, which trade on the New York Stock Exchange, are down 15 percent and Yahoo’s are off 16 percent.
One of Mayer’s earliest moves as CEO, in fact, was to sell a large chunk of Yahoo’s stake in Alibaba for $7.6 billion in 2012, though that transaction netted Yahoo only $4.3 billion after taxes — hence, this time around, the complicated spinoff scheme was concocted in order to avoid a similarly massive tax assessment.
So far, investors and analysts mostly seem confident that Yahoo will prevail with the IRS and that the deal will close in the fourth quarter, tax-free, just as planned. While Pivotal Research recently cut its price target on Menlo Park, Calif.-based Yahoo by $7 to $42, citing a “slightly higher risk” involving the spinoff, CRT Capital said precedent and law are on Yahoo’s side, and the firm reiterated its $61 price target on Yahoo, which closed at $39.54 on July 20. Mizuho Securities and SunTrust Robinson Humphrey remain similarly bullish on the stock. And some analysts are preemptively defending Mayer should things go south with the IRS.
“She is keeping her promise to try to separate Alibaba, which is good for her credibility with shareholders,” Laura Martin of Needham & Co. tells THR. “If the IRS says no to favorable tax treatment, that was out of her control, so it doesn’t hurt her.”
