Yahoo! (NASDAQ: YHOO) shares plummeted 8% during trading on the afternoon of Tuesday, May 19 and rebounded up 2 % in pre-market trading the following morning after the company affirmed plans to spin off e-commerce giant Alibaba (NYSE: BABA) despite rumors that the IRS will tax the move.
The stock drop was due to investors overreacting to an IRS official’s statement made on Tuesday. The official commented that the tax-collecting agency is considering to start taxing company spinoffs, which are usually not taxed.
In a blog article posted on Wednesday morning, Yahoo officials noted, “Yahoo understands that the IRS’s statement is not specific to Yahoo’s planned Q4 2015 spin-off of its remaining stake in Alibaba Group and Yahoo Small Business, reflects no change in applicable law, and does not affect previously filed ruling requests. Yahoo continues to work toward completing the planned spin-off in Q4 2015.”
When Yahoo filed with the IRS earlier this year, the company’s stake in Alibaba was worth approximately $40 billion. Yahoo investors are expecting a decent return from the Alibaba spin-off once it is complete and does not want a change in IRS tax rules to affect that.
On May 20, Bank of America analyst Justin Post weighed in on Yahoo and maintained a Buy rating on the stock but slashed his price target from $58 to $56. The analyst believes that although the IRS announcement did not specify any particular company, it may have been inspired by the Alibaba spin-off.
Overall, the analyst has a 68% success rate recommending stocks and a +18.7% average return per recommendation.
SunTrust analyst Robert Peck also weighed in on Yahoo on May 20, maintaining a Buy rating on the stock with a price target of $59. The analyst thinks Yahoo’s current share price reflects the potential IRS tax outcome. Peck noted, “Alibaba shares from Yahoo! would be tax free based on potential rules changes. It is extremely unclear what exactly the IRS may be studying, or what impact it could have to Yahoo’s proposed spin. We believe that ambiguous statements from a non-senior employee at a DC event is not how the IRS would communicate breaking or ‘material news’”
