Image Description/Source: Berlin Wall, 1963; Roger
We ran a video in late January about the concerns we had with Yahoo’s (YHOO) fair value uncertainty, and it turns out they weren’t unfounded (see video). One of our biggest issues surrounding the company was the potential tax ramifications of the spinoff of Alibaba shares (BABA) and whether ultimately the tax bill would land on shareholders’ laps.
It turns out that it just might.
Bloomberg reported May 19 that the IRS is considering a rule change that would “affect IRS rules for spinoffs by creating new US guidelines that might require a minimum size for active businesses inside the spun-off company.” As it stands right now, Yahoo’s spin-off is just an investment entity with no ongoing “active” operations. Technically, NewCo is a bunch of Alibaba shares. In this light, it appears the spinoff may not fly with the newly proposed rules.
We’re not surprised.
The political pressure to collect “outsize” taxes from entities will not stop during the current administration. Government budgets are strapped, and social agendas have probably never been more in vogue. Several tax-inversion deals have been scrapped due to last-minute IRS rule-changes, perhaps the most notable being Abbvie’s (ABBV) axed deal for Shire, but there was also Walgreens (WBA) where, as the Huffington Post put it: “Americans Scared Walgreens Out of a $4 Billion Tax Dodge.” There was actually a threat of a consumer boycott against the age-old household company.
Don’t consumers know that Walgreens is a holding in the S&P 500, and most retirement accounts, pensions, and index funds have exposure to the company? The answer appears to be no. Instead of creating wealth for Americans in retirement via tax-saving transactions, the would-be “saved” funds will now find their way into who-knows-what political program. The blocking of tax-inversion deals, in this author’s eyes, restricts the freedom of business, and by extension, mobile capitalism.
If history is any guide, it would seem that tax lawmakers may want to think about the current political agenda’s similarities with respect to that of a “new” Berlin Wall–not one built of barbed wire but of prohibitive, restrictive tax laws–and whether such measures make sense in light of the events of the late 1980s. For example, why can’t companies leave the US under existing tax laws? And should politicians really be able to change laws ex post-facto, or once a deal or spinoff is announced? Don’t the shareholders own the business, and aren’t the shareholders consumers, too? These are great questions. It’s certainly a tough environment to be a business owner these days, and things will only get more stringent on business freedoms in coming decades.
Yahoo is unfortunately finding this out right now.
As for Alibaba, the prospect of a reduced number of shares coming to market in the event the spinoff is blocked is a modest positive. Still, we’re most interested in Alibaba’s long-term potential, and we’ll be monitoring the company’s ongoing price-to-fair value convergence closely.