Yahoo pressured to keep Alibaba stake, sell core business

The activist hedge fund that has pressured Yahoo for more than a year to improve its stock price is now urging the company to forgo a plan to spin off its 15 percent stake in the Chinese e-commerce giant Alibaba Group and instead sell its core business.

In a letter sent to Yahoo on Thursday, the investment firm Starboard Value argued that the reason for spinning off the Alibaba stake — avoiding taxes while raising money for shareholders — appeared to have evaporated after questions arose over whether the Internal Revenue Service would crack down on such transactions.

Instead, Starboard argued, the company should explore selling its core advertising business, leaving behind only its stakes in both Alibaba and Yahoo Japan. Although such a move would incur taxes, it would be swifter and more certain than pursuing an Alibaba spinoff that could lead to years of fighting with the IRS.

“If you stay on the current path, we believe the potential penalty for being wrong is just too great, and the potential reward for being right is not materially better than the other alternative,” Jeffrey Smith,

Yahoo declined to comment on the letter.

The move by Starboard is the latest wrinkle for Yahoo, which has labored to find a turnaround plan that will stick. Under its current chief executive, Marissa Mayer, the technology company has pursued a campaign to improve its products and advertising capabilities.

Many of those efforts have met with little success so far. The company disclosed in its last earnings report that it had taken a $42 million write-off on its venture into original video content, including by buying the series “Community.”

Starboard argued that because those moves were flailing, Ms. Mayer and her team should instead pursue a sale of the core business and leave behind the stakes in the Asian Internet companies to eventually be sold off.

Adding to its conviction is the question of whether the IRS would seek to tax Yahoo for its spinoff of the Alibaba stake into a separate company, to be called Aabaco Holdings. The government notified Yahoo that it would not provide guidance about the tax liability tied to the transaction, worrying investors and analysts that the IRS would eventually seek taxes from the deal.

Were that to happen, the bill could run into the billions of dollars.

Yahoo and its advisers believe that the pending transaction falls within pre-existing guidelines for tax-free spinoffs. In its letter, Starboard agreed that the deal should be deemed tax-free, but argued that the company should yield to reality and prepare for the worst.

And whether or not the spinoff is completed, the hedge fund continued, Wall Street continues to believe that the core Yahoo business has a dim future.

“We actually believe that without significant change to the culture at Yahoo, the core business could just as likely (if not more likely) decline in value going forward, thereby making a near-term sale of the core business even more clearly the correct decision,” Mr. Smith wrote in the letter.