An update from Eric Jackson: The Wall Street Journal reported a "scoop" overnight that Yahoo! could potentially save billions on disposing of its Asian assets through something called a "cash-rich split." I first reported on this structure for TheStreet six weeks ago, as it had been actively pushed as a viable option by shareholders (including me) to the intransigent board since the summer.
NEW YORK (
) -- Over the last week, there has been a lot of speculation about whether and how
might get acquired.
The hounds have been circling the prey. There's clearly a lot of value embedded within Yahoo!'s core business, its stake in
and in its stake in
However, there are many misconceptions shared in the mainstream media, including the venerable
Wall Street Journal
, surrounding some aspects of how value might be unlocked.Let me correct these misconceptions.
First, let's talk about if
or any other company was to swallow Yahoo! whole. Some have speculated that such a move would trigger a change-in-control clause that's part of the 2005 investment between Yahoo! and Alibaba Group. If that was true, Alibaba Group (or stakeholder
) could object to such a deal and have a "right of first refusal." That would lower the value of Yahoo!'s 40% stake in Alibaba Group.
Yet, I've spoken to investors in both Microsoft and Yahoo! -- some of whom have spent a lot of money on multiple law firms to go through the agreements -- and they are firmly of the opinion that this view is false. When Microsoft proposed acquiring Yahoo! back in 2008, a "change of control" clause would not have been triggered because Yahoo! would not have ceased to exist. The company would have continued as an operating entity under Microsoft. Microsoft would have gained full access to the Alibaba Group (and Yahoo! Japan) stake. Jerry Yang would have remained on the board. Yahoo! would still have the right to appoint a fifth member to the Alibaba Group board.
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The Tax Fallout
The second misconception is around what the tax implications are for Yahoo!'s stake in Yahoo! Japan and Alibaba Group. Several media reports have indicated that these tax issues are weighing on Yahoo!'s ability to spin off or dispose of these assets.
If Yahoo! has any plan to dispose of its Alibaba Group stake, they certainly haven't said anything along those lines, even though I've spoken out in favor of them selling 10% of their stake (4% of Alibaba Group overall). However, Yahoo!
been talking about unloading their stake in Yahoo! Japan since at least January -- and yet, they haven't done it, frustrating investors.
The media's conventional wisdom on this issue is that it is inevitable that Yahoo! must face a 35% corporate tax rate hit to the IRS upon disposal of either of these two assets.
According to the shareholders I've spoken to, there are two simple paths to a tax-free disposal of these assets. The first of these is called a cash-rich split. As the name implies, a significant amount of the new entity is made up of cash, in addition to the Yahoo! stake.
A second approach would place Yahoo!'s stake in a holding company. This then gets spun out and trades publicly for one year. It then can be acquired by a new entity (like Alibaba Group, Softbank, Microsoft or others) through a reverse-merger tax-free. Such an approach has previously been used by John Malone very successfully.
There are other more exotic solutions to this problem as well.
Now, it should be said that Yahoo! could very well be dragging its feet on these issues simply because they don't want to get rid of either asset. I wouldn't be surprised if this was the case. What would be its excuse? The company could say something like: "We've already considered that solution and our advisors have said it's not possible." The mainstream media would probably accept that at face value and not do any further digging.
Yet, it's a bunch of baloney. I doubt that Yahoo!'s even received such advice.
Yahoo! has even used this excuse a couple of weeks ago when I approached them directly about unloading 10% of their Alibaba Group stake so that they could help establish a market price for that asset prior to Alibaba Group's IPO.
The mainstream media -- and especially large Yahoo! investors -- must not accept anything this board of directors says at face value. They must push to really uncover the truth. Those investors who make the effort -- and speak up -- will be justly rewarded for their troubles.
At the time of publication, Jackson was long YHOO and MSFT.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson