Mayer has been facing increasing pressure from investors to liquidate the company’s Asian assets and return the proceeds to shareholders.
Instead, Yahoo has decided to transfer the Alibaba stake to its shareholders by awarding them shares in a new vehicle. The company said: “Yahoo believes this transaction will achieve the most advantageous return of capital to shareholders with the absolute highest probability of success.”
As such, Yahoo sought the IRS’s blessing in the form of a private-letter ruling, which would give investors assurance that a spin-off could be completed. However, the IRS declined to respond. This was followed by the IRS issuing a guidance, whereby it expressed its concerns of spin-offs that consist of investment assets and minimal operating businesses.
According to Richard Windsor, analyst at Edison Investment Research, this is an indication that there continues to be no progress on Yahoo’s turnaround and therefore the substantial pressure to deliver something remains.
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“Not only has the IRS declined to rule on the spin-off but it has also said that any guidance it gives in the future will not apply retroactively to transactions that are completed in the past,” Windsor said. “Consequently, there is now the risk that anything up to 30 per cent of the value of the Alibaba investment may go to the IRS rather than shareholders of Yahoo.
“The reasonable move would be to put the transaction on hold until there is clarity on how it will be treated for tax as this has the best outlook for preserving value for shareholders. The problem is that for the last two years there has been so little progress at Yahoo other than the Alibaba investment, and a delay here would clearly put the focus back on the company’s lack of execution.”
He claimed that this was something the company could not afford as the company was squandering a huge proportion of the opportunity that it had in mobile.
“Yahoo claimed to have 600m monthly active users on mobile which translated into $252m in revenues,” he said. “Yahoo has excellent coverage of Digital Life (73 per cent), thanks to its acquisition spree, meaning that its addressable market is not dissimilar to that of Google.”
With 63 per cent coverage of Digital Life, he estimated that Google generated $2.63bn in revenues from 749m users of Android devices. Had Yahoo executed on its assets as well as Google, then the company should have generated $2.5bn in revenues from mobile, he said.
The result is a company that feels under pressure to deliver something to investors even if that means that a large portion of that value is lost, Windsor claimed. He suggested that there was no sign that the underperformance of Yahoo was coming to an end as execution in mobile remained disappointing.
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