The decline didn’t last long though as the company sent out a note that that the company had nothing to fear given that it had already submitted its plans and the IRS comments were ‘going forward’. CEO Marissa Mayer then assured investors that although there was still a lot of work to be done, things were still on track.
That seemed to be the end of the story, but last week Capstone analyst Max Reale cast fresh doubt on the transaction stating that after reviewing comments by a senior IRS technician, he thought it was unlikely for the IRS to approve the spinoff. Mr. Reale noted two reasons for his concerns:
First, Yahoo’s approximate stake in Alibaba is valued at $34 billion and a tax-free spinoff is designed to save nearly $11 billion. The analyst cited the law firm Wachtell, Lipton, Rosen & Katz who said there were 201 spinoffs announced in 2013 and 176 in 2012, with aggregate values of $33 billion and $41 billion, respectively.
Second, Yahoo “barely reacted” to the IRS comments and was “dismissive of the potential threat.” Moreover, the company’s only public reaction amounted to a two-sentence statement in which the company announced it will continue as planned with the spinoff and does not believe it will be affected by the comments.
Wow. First, the sheer size of Yahoo’s Alibaba stake is just astounding. Its value alone is more than the total aggregate value of all spinoffs announced in 2013?! Seriously?! I would be interested in seeing the data behind that, but there is no doubting the sheer magnitude of this spin.
Second, what do his comments say about our regulatory environment? Activists and CEO’s talk about the tax ‘efficiency’ of spinoff transactions, but what that really means is that the IRS isn’t getting its ‘cut’. Poke the bear enough times and in such a big and brazen fashion and it’s really no surprise that there is finally a reaction. Would you really put it past this ‘highly revered’ government agency to invoke such a rule and apply it retroactively? Lets just say I wouldn’t consider it a 0% risk and I think that is really his second point. While I wouldn’t really expect the company to freak out over mere comments, Mr. Reale does note that ‘it appears that Yahoo shares are reflecting little likelihood that the transaction will not go through as planned.’ Given that he estimates an unfavorable change in the tax code could result in over $11 per share in tax expense, there is some cause for concern and indicates real downside potential.
Seeking to once again to quickly put out the flames, Ms. Meyer once again noted how ‘confident’ she was in the transaction’s success and that all was proceeding according to plan.
Ultimately, shareholders need to consider how spiteful the IRS can be and how confident they are in Ms. Mayer’s reading of the situation. Of course, there is always the choice to pick up some downside protection just in case something changes. This will be an interesting situation to follow and one that could have serious repercussions for the spinoff transaction in the future.
Disclosure: Author holds no position in any stock mentioned