There is a considerable amount of uncertainty that surrounds the direction that Yahoo! Inc. (NASDAQ:YHOO)‘s stock will take following Alibaba’s IPO. There are two main features of this IPO that according to Rob Sanderson, who is a managing director at MKM Partners, tilt the scale in Yahoo! Inc. (NASDAQ:YHOO)’s favor. During an intervention on CNBC, he explained them to be tax efficiency and the presence of a liquidity event in general.
” […] Another giant swing factor that can’t be overlooked here is the potential for tax efficiency on the second half of the spin, and there is an enormous amount of value for Yahoo! Inc. (NASDAQ:YHOO) shareholders, should there be a tax efficient mechanism to distribute the Alibaba portion […], ” said Sanderson.
If Alibaba’s IPO is compared with a spinoff, with Yahoo! Inc. (NASDAQ:YHOO) acting as a parent company, then history has some worrying lessons to offer to the investors. EMC Corporation (NYSE:EMC)’s spinoff of VMware, Inc. (NYSE:VMW) and 3Com’s spinoff of Palm are two particular events where it didn’t fare very well for the parent company. In both these cases, the parent company sold off a few days ahead of the IPO, never to recover for years to come. Many Yahoo! Inc. (NASDAQ:YHOO) investors are in the game just for the same reason. As soon as Alibaba’s IPO is no longer the buzz of the street, investors might dump Yahoo! Inc. (NASDAQ:YHOO).
Sanderson pointed out that the sum of parts approach to valuation is generally problematic, as companies do not trade at those values except when there is a liquidity event, which in this case is Alibaba’s IPO. Additionally, as Yahoo! Inc. (NASDAQ:YHOO) is only committed to sell around 30% of its current stake in Alibaba for the IPO, a lot depends on what the company chooses to do with its remaining 70% stake. In these circumstances, tax efficiency and high valuation owing to this liquidity event play a vital role.
To provide a numerical perspective, Yahoo!’s investors value their investment to gain $26 – $45 / share, while the initial portion of Alibaba shares has an embedded Yahoo! Inc. (NASDAQ:YHOO) share value of $5.75 to $6.3.