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Will the Yahoo Board Pause Its Alibaba Stake Spinoff?

And, if it does not, where will that lead?

According to sources close to the company, Yahoo’s board is seriously considering pausing a planned spinoff of its lucrative 15 percent stake in China’s Alibaba Group, with an eye toward waiting for more clarity about the tax issues of such a transaction.

That would be a big shift in strategy. Yahoo CEO Marissa Mayer has promised the spinoff of Aabaco Holdings by the end of this year and then later extended the deadline to January. According to sources, it is largely ready to go and she still wants to pursue it. In fact, sources added, Yahoo already has a CEO and board in place for the new company.

Whatever the choice made, Yahoo will have to tell bondholders what its plans are by next week.

If paused, the implications of such a move — which directors have been taking up at the Silicon Valley Internet giant’s regular board meeting this month — will have a cascading impact on a number of other issues facing the much beleaguered Yahoo under the troubled leadership of CEO Marissa Mayer.

The $23 billion spinoff of Alibaba was supposed to be a bright spot for Mayer, settling demands from activist shareholder Starboard Value to unlock the value of Alibaba from the weak core business. Instead, it has become mired, after the Internal Revenue Service declined to rule that the transaction would be tax-free.

That leaves a giant bill hovering over the transaction, valuing the new company at a discount until the IRS rules (which could be years). This uncertainty has caused Starboard to do an about-face and call for Yahoo to sell off its core Internet business instead and leave the Alibaba stake, a chunk of Yahoo Japan and also a lot of cash in Yahoo.

The board has not been as focused on that move, having been looking at a possible restructuring of the core, despite calls to do more from some investors. And while Yahoo is being advised by both Goldman Sachs and J.P. Morgan, those banks were hired a while back to help on Yahoo’s defense of activist attacks and not to pursue a sale.

I have long maintained that Yahoo should sell itself or go private and, without a spin, pressure to do so could grower stronger. If that happened, obviously, there would be many buyers, including private equity firms, although many have told me that the ability to make a financial killing on Yahoo is limited.

Still, while big PE players like Silver Lake and KKR are not moving in, as I previously reported, others such as TPG and also Apollo Global Management have been considering approaches.

A more likely buyer would be a big telco — AT&T has eyed Yahoo before — in a deal similar to Verizon’s acquisition of AOL for its advertising tech and content. Yahoo has that and more, which also makes it attractive to big cable and some media giants. News Corp’s majordomo Rupert Murdoch, for example, had once taken a run at Yahoo and would doubtless do it again.

In addition, as always happens, the new spate of attention on Yahoo has caused every banker to shine up pitches for clients to take a look.

One issue: Mayer is against a sale and could stake her job on blocking it. And, currently, the board is supporting her, even though the media has being debating whether she will be fired soon.

She will not, although she will be taking a short maternity leave soon to have twin girls, who are expected to be born this month.

That, as well as no major need to do anything amid such a circus, points to a slower rollout of any significant move for Yahoo.

But any pause in the spinoff could just as quickly increase tensions between her and Yahoo directors, some of whom have been stronger than others in pushing Mayer to hone her strategy. Among those are Charles Schwab, former Intel Chairperson Jane Shaw and former IAC CFO Tom McInerney, who sources said have been pressing Mayer hard. Yahoo co-founder David Filo, former Walmart Stores CEO H. Lee Scott and entrepreneur Max Levchin have been more supportive.

Chairman Maynard Webb and former Ernst & Young partner Sue James have been Mayer supporters too, but Webb has also met with Starboard’s Jeff Smith and is likely to play a larger role in any big move the company makes next.

For now, as I said, the group is closing ranks and backing Mayer, who is one of the most high-profile woman executives in Silicon Valley. That might not last if they proceed with the spin and get attacked by Starboard, which has been preparing a proxy fight to gain board seats and will also be offering a new slate of directors.

Nothing like an impending noisy public fight over Yahoo control to sharpen the minds of the board! Yahoo has been to this goat rodeo before with activist investors like Carl Icahn and Dan Loeb and it was not fun. More to the point, it has de-focused the company severely.

Even worse, the corporate machinations could be even more complex. As SunTrust analyst Bob Peck wrote recently: “Among the many alternative choices the Board could pursue are: sell the core outright; spin the core; sell the entire company; do a cash rich tax free split; outright sale of Asian assets; pause the spin until there is more clarity from the IRS; issue tracking stock; or maintain the status quo.”

Let’s just all agree the status quo is a nonstarter now, as Mayer has frittered away her options in her more than three-year term. As Re/code has long reported, the turnaround she has been attempting at the company has not yet yielded results, as Yahoo’s advertising business has further deteriorated and its ability to create innovative products has lagged well behind competitors. Mayer was brought in from Google to change all this, but has not managed to do so as yet.

And — as I have also pointed out for a dog’s age now — if ever.

Update: Jeff Smith of Starboard Value provided the following statement:

Given the strong interest in an acquisition of Yahoo’s core business, the uncertainty and unacceptable risk around both the plan to spin Aabaco and the eternal, elusive hope for a public turn-around, and the strong support from shareholders to abandon the proposed spin and sell the core business, clearly the best outcome for shareholders would be for Yahoo’s board to immediately abandon the spin and commence a competitive process to sell its valuable core business at the highest price possible. It is imperative for Yahoo’s board to understand its fiduciary responsibility is to the shareholders and act as proper stewards of shareholder value.

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