Activist investor Starboard wants Yahoo to sell Internet business and keep Alibaba

SAN FRANCISCO – Activist investor Starboard Value is urging Yahoo to scrap a planned spinoff of its lucrative stake in Chinese e-commerce company Alibaba and sell its own Internet business instead.

The demand, outlined in a Thursday letter to Yahoo CEO Marissa Mayer and the company’s board, represents a reversal for Starboard. The New York hedge fund last year began pressuring Mayer to spin-off Yahoo’s Alibaba Group stock into a different company to avoid paying future taxes on the gains on its original investment of $1 billion. Yahoo’s stake in Alibaba currently is worth $30 billion, far more than its main business of showing ads on its websites and mobile applications.

Starboard wants Yahoo to hold on to Alibaba because of the uncertainty raised by the Internal Revenue Service’s refusal to guarantee the spinoff will qualify for a tax exemption. Yahoo is still planning to transfer its 384 million Alibaba shares into a new company called Aabaco because it believes tax law is on its side. The spinoff is scheduled to occur next month or in January.

If the spinoff doesn’t get an exemption, the tax bill and other costs associated with the manoeuvr could total about $19 billion, estimated SunTrust analyst Robert Peck.

“We urge you to change direction and do the right thing for shareholders,” wrote Jeffrey Smith, Starboard’s managing member. If Yahoo doesn’t heed the advice, Smith threatened to lead a shareholder mutiny to overthrow Yahoo’s board. Starboard has a nearly 1 per cent stake in Yahoo, according to FactSet.

Yahoo declined to comment Thursday.

Under Starboard’s alternative scenario, Yahoo Inc. would become the holding company for two Asian investments, Alibaba and Yahoo Japan. The hedge fund didn’t suggest who might be willing to buy Yahoo’s Internet business, where revenue has been declining for years even though advertisers have been steadily increasing their digital marketing budgets.

Starboard’s missive is the latest sign of the mounting pressure on Mayer, who has been unable to engineer the turnaround that she has been promising to deliver since Yahoo hired her away from Google to become its CEO.

In an unusual step for a Wall Street analyst, Peck recently sent a letter to Yahoo’s board of directors recommending that the Sunnyvale, California company dump her as CEO.

Yahoo’s stock has more than doubled under Mayer’s leadership, but the gains have been driven by the rising value of the Alibaba stake. In a sign that Wall Street is losing confidence in her strategy, Yahoo’s stock has plummeted 35 per cent this year while the Standard & Poor’s 500 index has risen 1 per cent.

Yahoo’s shares shed 1.1 per cent Thursday to close at $32.62.