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Yahoo to press ahead with potentially very expensive Aabaco spin-off plan

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© Yahoo

  • Goes head-to-head with the IRS
  • Betting the farm that the Internal Revenue Service will blink first
  • Despite the fact that the IRS can outstare a pit full of rattlesnakes
  • Last throw of the dice for the fifth Yahoo CEO in six years?

Yahoo is taking a gamble that could cost its shareholder's dear and result is the summary departure of board members, senior executives and the company CEO, Marissa Mayer, if the wager fails to pay off. And, given that the company is betting against the infamous US Internal Revenue Service (IRS), an organisation of such bloody-minded determination and remorselessness that it makes the Royal Canadian Police, (who "always get their man"), seem like a bunch of cub scouts playing blind-man's buff in a disused coal mine, the odds are stacked against Ms. Mayer.

For Yahoo is determined to continue with its plan to spin-off its potentially very lucrative stake in the Alibaba Group of China into a separate company called Aabaco. It will be the new home for the many Alibaba shares that Yahoo still owns and that are valued at somewhere in the region of US$23 billion. Ms. Mayer has sold the "new separate entity" strategy to Yahoo shareholders on the grounds and assurance that any such deal would be a tax-free transaction. However, the IRS has decided to "review" its policy with regard to such corporate tax-avoidance stratagems and is minded to reclassify them as taxable.

Marissa Mayer has made herself a hostage to fortune by publicly proclaiming that, in her view, a change of policy on the part of the IRS would have no effect on the plan to spin off Yahoo's Alibaba shares into Aabaco.

Given that her tenure at Yahoo to date (she took over on July 12, 2012) has hardly been an unalloyed triumph, the fact that the company's share value has continued to decline (it has slid by 45 per cent so far in 2015) and that the IRS pointedly refused to provide Ms. Mayer with a "personal"letter confirming that the Aabaco transaction would be tax free, the CEO seems to be betting the farm and her future that the IRS will, eventually, declare the spin-off to be tax free. If it does not do so, Yahoo and its stockholders will will become liable to pay tax of some $9 billion and Ms. Mayer will be history shortly thereafter.

Must do better

Yahoo has to do something to slow its apparently inexorable fall from grace as it continues to try to stabilise its core but declining online advertising business. It's not doing very well. Much rides on the success of the spin-off, hence all the urgency to get the deal done before December 31, this year, in the hope that, if the tax regime does change it won't be applied retrospectively.

The pressure on Ms. Mayer is all the more intense because the economic downturn and stock market crash in China has reduced the value of Alibaba shares by half in the past few months. Meanwhile the CERO labours on under the terms of a five-year "compensation package" that will see her getting paid $117 million.

The Alibaba asset isn't worth anywhere near what was and shareholders are very jumpy. They want their money, but the value of the Chinese asset is sliding so they'll get a lot less than they would have received had the Alibaba shares been sold earlier and they might even get stung with a big tax bill later on. No wonder Marissa Mayer is looking over her shoulder.

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