Yahoo shares rise on decision to proceed with spin-off of Alibaba stake

The stock is 45% down in 2015 through the end of business Monday.

The IRS said in May that the agency is considering changes to its rules governing spinoffs, sending Yahoo shares sliding.

In 2005, Yahoo paid $1 billion for its 40% stake in Alibaba. But an IRS official later indicated that any amendments would not apply retroactively, implying that Yahoo’s spin off could be tax free.

However, Yahoo! through a federal filing with the Securities & Exchange Commission announced that on September 2, the U.S. Internal Revenue Service (IRS) had declined a ruling on its request for a tax-free spinoff. In trading on Monday, Yahoo dropped almost 5.3% to close the day at $27.20/share.

Sanderson said eliminating the overhang of the Alibaba stake will allow Yahoo to reinstate an aggressive stock buyback program, and investors to revalue the company based on the growth prospects of its businesses. Yahoo Inc.’s (Nasdaq: YHOO) Alibaba shares are worth roughly $22 billion.

Yahoos issued a statement that it would move forward and complete the spinoff 384 million in the fourth quarter. Still, Wall Street’s concern over the stamina of the company’s core business has taken its toll and Yahoo stock has declined 44% since the start of the year. The company, however, is at risk of tax audit objections from IRS, even though the act will consume ample amount of time.

Doshi added that Yahoo can still decide to cancel the spinoff transaction. But since this sale will occur during Q4 and there is little indication that anything major will substantively improve Alibaba’s standing in the short term, this means that Yahoo will be spinning off its remaining stake in Alibaba significantly below its IPO price. Mayer appears to be betting that Alibaba’s share price will rebound and that it would thus be in shareholders’ interests to hold onto the stake, especially if they don’t have to pay any tax on the transfer. Yahoo! can now fully concentrate on pursuing growth.