There's another issue here. How will the market perceive any changes made with respect to BABA shares? At this time, neither BABA nor Yahoo Japan are reflected in the stock price at their fair market value. Any changes with respect to either should be undertaken such that the market will revalue the contribution to Yahoo, and that's the challenge. Selling the shares and paying the income tax is one way, but that is not tax efficient. Spinning off BABA shares into a separate entity will not cancel the existing US tax liability.
Alibaba has become a poster child for Chinese economic success. Regardless of the actual results, what will be reported will confirm the highest expectation. To do otherwise would be unpatriotic and result in a lack of support from the Chinese government.
Alibaba will not disappoint; rather, it will meet the highest expectations. To do otherwise would cause friction between Alibaba and the Chinese government. A move by BABA to $110 after earnings is almost assured.
I'm really not sure what the consequences of what you propose are. I know that if Yahoo were to try to distribute shares of BABA directly to Yahoo stockholders, the transfer would be taxed at Yahoo's level according to the capital gain. It appears that our tax laws may be thorough enough to prevent companies from avoiding tax on capital gains if any transfer of any kind was employed.
BABA shares can be spun off into a separate entity, and the shares in that entity distributed to existing Yahoo stockholders. But the entity would hold those shares at a cost basis equal to that currently listed by Yahoo, so any later sale by that spinoff would be taxed at the same rate as a sale right now by Yahoo. If the shares were not sold, but continued to be held for many years, would the market ever value the shares at the current market price, or continue to value them a the current market price, less 35% for capital gains tax, as it does now? If Alibaba paid dividends that were in proportion to the stock price, I could see a spin off valued at something between the BABA price and the BABA price less tax. But if BABA keeps earning for expansion, then I could see a spinoff having no effect on the current value of Yahoo shares.
The earnings report was excellent. They had some major, unusual expenses directly or indirectly related to going public during the quarter. Alibaba is growing at an amazing rate.
The advantage to Alibaba would be to reclaim their shares at less than the market price. Right now BABA shares held by Yahoo are being valued at 35% less than the market price to account for income tax. If Yahoo were purchased by Aibaba, and the BABA shares then cancelled by Alibaba, I'm not sure how the IRS would view that transaction.
Alibaba has the most lucrative and successful business model of any Internet company in the BtoB or BtoC sector. The company links manufacturers directly with buyers, acting as link, not a retailer. Such a business model would be impossible without the ability to store and transmit information at the level enabled by the Internet.
You can take away the middleman, but not the middleman's function. Alibaba provides the middleman's function at the lowest possible cost. The cost to Amazon is much greater to do the same, so Amazon can never successfully compete with Alibaba in the same environment.
Failure by MM to provide a meaningful amount of info regarding the plans for the BABA shares still held suggests that talks were underway which would affect those shares.
Keeping the Alibaba connection may be the best path for Yahoo for at least the next few years. There's no better use for the $42 billion now in Alibaba.
BABA is pulling Yahoo up, kicking and screaming all the way.
So many investors don't understand the linkage between Yahoo and Alibaba, or don't think the BABA price is sustainable. Price linkage between the two is undeniable, but not manifest immediately.
Watching Tim Armstrong refuse to comment on a combination of AOL with Yahoo on the CNBC interview yesterday, it was pretty obvious that negotiations are under way. Tim had difficulty hiding it.
I don't think that Alibaba wants Yahoo. It's not because it's not a desirable company; rather, Yahoo does not fit well with Alibaba's core business.
I'm beginning to think that it's best for Yahoo to remain in its current form, with possibly a combination with AOL. Yahoo is a diversified investment in the tech industry, offering the investor participation is Internet commerce, business information, social interaction, and streaming video. And there's always the upside of a reduction in business tax that would raise the value of legacy holdings in Alibaba and Yahoo Japan.
BABA is tough to value. It's got a fantastic growth rate with expectations of continued growth, perhaps at an even greater rate. It's what I think of as a truly international Internet retailer. Combine that with an uncertain tax situation with respect to Yahoo owned BABA shares, and you have confusion. The market doesn't know what to think just yet, thus we have a fairly loose link between BABA and YHOO share price.
Yahoo will probably continue to hold BABA shares, not liquidate them, so the tax effects are moot. However, the market continues to value Yahoo based on the after tax value of both Alibaba and Yahoo Japan. I don't see that changing by any great extent.