Yahoo! Inc. (NASDAQ:YHOO) has decided to forge ahead with its plans to spin-off its stake of 384 million shares of Alibaba Group Holding Ltd (NYSE:BABA), despite not receiving a favorable ruling from the IRS for the plan, which could leave it subject to a tax bill in the billions of dollars at some point in the future. The IRS also recently expressed concerns over deals like the one Yahoo is planning, in which valuable assets such as real estate holdings are spun-off into a business with minimal operations in a tax-free transaction, though it didn’t specifically mention the Yahoo situation. Such has been a growing trend in the retail sector of late, with Macy’s, Inc. (NYSE:M) and Sears Holdings Corporation (NASDAQ:SHLD) among the retailers confirming spinoffs of their real estate assets. Jeffrey Smith’s Starboard Value has been a prominent player in pushing for such moves, including the asset spinoffs planned by both Macy’s and Yahoo, as well as a similar move by Darden Restaurants, Inc. (NYSE:DRI).
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Shares of Yahoo! Inc. (NASDAQ:YHOO) are up by 3.30% in pre-market trading this morning following the news. Some analysts believe the news signals the fact that Yahoo is confident its transaction will not end up being taxed, despite the IRS’s apparent lack of support for it. However, Yahoo may simply be backed into a corner at this point to where it simply needs to risk it and sell the stake one way or the other. With its core business continuing to struggle, the sale could allow Yahoo to look into further acquisitions aimed at growth, in addition to returning a large chunk of the money to shareholders.
There is also the fact that the Alibaba Group Holding Ltd (NYSE:BABA) stake is dwindling in value by the minute. What was once worth over $45 billion shortly after Alibaba’s IPO is now worth less than half that as Alibaba has been ravaged partly by its own underwhelming performance, and partly by the broader concerns over the Chinese economy. Nor has Alibaba necessarily hit rock bottom; Barron’s recently declared that it could lose another 50% of its value given its high valuation even in the wake of its declines this year. Thus a tax bill could be preferable to hanging on to a wilting stock.