Difference between revisions of "The Economic rationale behind spinoffs"

Revision as of 02:15, 22 June 2017

Firms Involved

• Alibaba
• Yahoo

Year of the event

1998-2016

Description of the case

Long ago, Yahoo bought a 40% participation in a tiny Chinese firm for a modest amount. In 2015, this participation had grown to become larger than the value of Yahoo itself, though Yahoo owned only 20% of Alibaba by then. In fact, in 2015, Yahoo’s core business was worth around $5bn, while its participation in Alibaba was worth circa $40bn. Under the pressure of shareholder activist Starboard Value^[1], Yahoo planned to spin off its participation in Alibaba in a new entity, and give the shares to its shareholders. That was a major issue, as the DOJ was looking forward to taxing heavily this transaction^[2], which would result in the loss of $16bn (40%). In 2016, Yahoo found another suitable solution: instead of making a spin-off of Alibaba’s shares, Yahoo would sell its core business, and the historic Yahoo would become a shell holding Alibaba Stock as well as various other participations and licenses. The reborn holding entity was named Altaba. The transaction was completed as planned, with Verizon acquiring Yahoo^[3] in June 2017. Yahoo, having cleared the shadow of the potential tax payment, appreciated sharply.

Take-aways

• The covenants and contractual details of a bond are paramount and can make the difference between profit and loss, sometimes spectacularly.
• The reach of the US is formidable, thanks to the implication of US intermediaries in most international transactions.

References

1. ↑ http://businesscycles.eu/tech/cowcot-entreprises-yahoo-contre-les-activistes/ Business Cycles (FR), Yahoo contre les activistes
2. ↑ Bloomberg, Yahoo Would Rather Not Pay Taxes on Its Alibaba Shares
3. ↑ Techcrunch, Verizon buys Yahoo for $4.83 billion