Traders Taking Yahoo Hit Are Latest Victims of Deals: Real M&A

At a time when traders who bet on deals are constantly being thrown curve balls, more bad news: Yahoo! Inc.’s plan to make them rich may be getting derailed.

The stock plummeted as much as 12 percent near the end of Tuesday’s trading session because the U.S. Internal Revenue Service is considering a change to the rules governing some tax-free spinoffs. The speculation is that this could complicate Yahoo’s plan to exit its Alibaba Group Holding Ltd. stake, which is valued at about $26 billion.

“If they change the ability to spin this off and you’re an event-driven manager trying to invest in the spread between the value of Yahoo and Alibaba, then you’d want to take that trade off now,” Colin Gillis, an analyst at BGC Partners, said in a phone interview. It’s still unclear what the IRS’s plans are exactly and how this will impact Yahoo, he said.

The news comes just one week after AOL Inc. agreed to be bought by Verizon Communications Inc. AOL was seen as a possible merger partner for Yahoo and another way to boost returns for shareholders. With that off the table and now the spinoff potentially in jeopardy, some investors are fleeing the stock.

“Now, let’s see what happens,” Gillis said. “There’s a chance it’s overblown, and there’s a chance it’s not.”

Yahoo Value

Most of Yahoo’s $38 billion market value is tied to its ownership of Alibaba, the Chinese e-commerce giant that listed on the New York Stock Exchange last year, and Yahoo Japan Corp. There may be shareholders who don’t see much benefit to owning Yahoo for its core operations and were hoping to cash out with the spinoff.

Marissa Mayer, chief executive officer at Yahoo, said at a conference earlier on Tuesday that the company’s efforts were still on track and it’s working hard to ensure that the entity is ready to be spun off in the fourth quarter.

The IRS’s ruling change may impact spinoffs of businesses that are small compared with other assets in a corporation. The entity Yahoo is planning to spin off would comprise a small legacy ancillary business along with its Alibaba holding.

Even if Yahoo can’t exit the stake the way investors were hoping, that doesn’t mean the holding’s value disappears, Gillis said. And there could be other ways for Yahoo to exit and still provide a boon for its holders.

Still, a delayed or blocked spinoff would deal another blow to so-called event-driven traders who have witnessed multiple transactions unexpectedly collapse in the past year. The most damaging of these surprises occurred when AbbVie Inc. walked away from its mega-merger with Shire Plc in October after the government worked to stop companies from using inversion deals as a way to dodge taxes. That situation highlighted the increasing risk in arbitrage trading tied to acquisitions and spinoffs.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE