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Yahoo! (YHOO) stock was sinking on Wednesday, Dec. 9, after the company announced it would drop a spinoff ofAlibaba (BABA) - Get Alibaba Group Holding Ltd. Report because of tax concerns.

Rather than spin off the Alibaba stake into a new group, Yahoo will package its core business and stake in Yahoo! Japan into a separate company. The stock sagged 2.5% to $34 in Wednesday afternoon trading, although it jumped as high as $35.84 earlier in the day.

Yahoo! Chairman Maynard Webb explained that the company believed that its original plan to spin off the Alibaba stake and a small operating business into a new vehicle called Aabaco Holdings would be tax free. However, developments in the market caused the board to rethink the strategy.

"Among other factors, we were concerned about the market's perception of tax risk, which would have impaired the value of Aabaco stock until resolved," Webb said in an investor presentation.

Even if Yahoo! were correct that the spinoff would be tax free, CFO Ken Goldman said the overhang could take years to resolve and weigh down the value of the Aabaco stock.

Jeffrey Smith's Starboard Value raised concerns about the tax status of the Alibaba spin in a November letter, and urged Yahoo! to explore a sale of its core business.

"Irrespective of the impending tax-free spinoff, it is clear the market has a dim view of the company's current strategy," he wrote. Wall Street "either discounts the tax benefits of the proposed spinoff and/or, worse, implies a significantly negative value for the core business based on a justifiable fear that the current turnaround efforts will fail and current management will continue to squander the company's resources," he added.

Management stated that the board had not determined to put the core business up for sale.

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Yahoo! made clear that the ultimate goal, to

clarify its valuation

by separating the Alibaba stake from its operations and its Yahoo! Japan stake, remains the same. The Sunnyvale, Calif., Internet group is just using a different means.

"Despite the change in the approach to our proposed Aabaco spinoff, the ultimate separation of our Alibaba stake is very important to our business transformation," CEO Marissa Mayer told investors.

Mayer trumpeted the success of Yahoo!'s mobile, video, native advertising and social media operations, which the company has dubbed "MaVeNS." Yahoo! expects $1.5 billion in 2015 revenue from the operations, an increase of 50%.

Yahoo! has become "one of the top three players in mobile," she said, saying that monthly average users of its mobile products have tripled to 600 million since 2012.

Goldman's counterpart at Verizon Communications (VZ) - Get Verizon Communications Inc. Report , Fran Shammo, suggested at a December investor conference that the telecom would take a look at Yahoo!'s core business if it came on the market. Verizon purchased AOL for $4.4 billion earlier this year.

Starboard's Smith had previously urged Yahoo! to consider a merger with AOL, before Verizon acquired AOL.

The argument was that Yahoo! would fit well with AOL.