Alibaba Group Holding Ltd Stake Puzzles Yahoo CEO Mayer

By Charliepug (Own work) [CC BY-SA 4.0], via Wikimedia Commons

Yahoo! Inc. (NASDAQ:YHOO) unloaded 140 million shares of Alibaba Group Holding Ltd (NYSE:BABA) when the Chinese company went public in September. The U.S. technology company received about $9.3 billion in proceeds. However, Yahoo still owns 16% stake in Alibaba, which is currently worth about $44 billion.

Should Yahoo spin off Alibaba stake in a separate company?

This huge stake has puzzled Yahoo CEO Marissa Mayer. She would have to choose between making shareholders happy or running a larger company, reports Bloomberg. If she chooses to sell off that stake, Yahoo will face a potential tax bill of $15 billion. The company’s management has been working with some of the “best tax experts” for more than a year to sell its stake in Alibaba, while avoiding or minimizing the tax bill.

An option that Yahoo shareholders favor is spinning off the Alibaba stake in a separate entity in a tax-free transaction. The value of the new entity would go to Yahoo shareholders. That’s the best approach for shareholders, says Eric Jackson of Ironfire Capital. But this approach has a big downside for Marissa Mayer. If the Alibaba stake is spun off into a separate entity, she would end up heading a company that is just one-fourth of current Yahoo.

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Marissa Mayer is expected reveal her divestment plans later this week. Bloomberg says Yahoo may still come up with a surprise solution to avoid the tax bill. Under the company’s agreement with Alibaba, it can’t sell its stake in the Chinese e-commerce giant until September 2015. Sources told Bloomberg that the Sunnyvale-based company has hired Goldman Sachs and JPMorgan to figure out a tax-efficient method to sell its Alibaba stake.

Yahoo could go Warren Buffett way

In fact, there is a tax-free alternative that would leave Marissa Mayer with a bigger company. It’s called cash-rich splitoff, the same strategy that recently Warren Buffett used to buy Duracell from Procter & Gamble. Buffett owned $4.7 billion stake in Procter & Gamble. He used cash-rich splitoff to turn over his huge stake in the consumer goods company in exchange for Duracell, while infusing $1.7 billion cash.

Yahoo shares fell 1.11% to $51.17 at 12:05 PM EST on Monday.