Yahoo ditches $32bn Alibaba spin-off after tax bill outcry

The American web search group could announce as early as today that it will instead look at selling or spinning off its core internet business, reports The Times.

Yahoo had planned to create a separate company called Aabaco by combining its Alibaba shares with Yahoo Small Business, which provides domain and website design for small businesses. The switch was announced in February and was due to take place at the end of this year.

However, the Internal Revenue Service told Yahoo that it would not rule on whether the company could avoid a tax hit when putting its stake into Aabaco. Given that the internet group had assured investors that the proposed sale would be tax-free, that sparked an outcry. Starboard Value, the activist fund, called for Yahoo to abandon its Alibaba spin-off and seek a sale of its core business.

The relief on Wall Street last night was palpable. Shares in Yahoo rose by 2.6 per cent to $35.75 in after-hours trading after CNBC first reported that the board had walked away from the spin-off.

The Silicon Valley company will now consider spinning off its core business — which includes its Mail service, news sites, products such as the Tumblr microblogging site and its advertising technology — together with its stake in Yahoo Japan, a move that poses a much lower tax risk.

No price was mentioned last night, but analysts were quickly speculating that it could raise anything up to $8 billion.

Abandoning the Alibaba spin-off will be seen as a serious blow to Marissa Mayer, Yahoo’s chief executive. She has struggled to turn round the company’s core business since she took over in July 2012. Revenue has declined by 9 per cent in that time, while earnings before interest, tax, depreciation and amortisation have fallen by 45 per cent.

“You want to separate out these assets as quickly as possible,” Colin Gillis, senior technology analyst at BGC Financial, told CNBC yesterday. “The [spin-off] that was going to happen in January was going to happen in a timely manner.”

Yahoo has a stock market capitalisation of more than $30 billion, although some company observers have placed the value of its core business at less than nothing, discounting its Alibaba stake and other equity interests.

The one-time darling of the California technology scene has been under pressure for some time having long since fallen behind Google, Facebook and others.

It tried to increase its revenue with forays into original programming this year, striking exclusive deals for television shows such as Community, but that strategy flopped, forcing Yahoo to write down $42 million and shelve similar plans.