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Here’s How Much The Market Hates Yahoo’s Latest Spin-Off Plan

December 9, 2015, 7:18 PM UTC

For Yahoo, like the rest of us, taxes are still a certainty of life, even with its new spin-off plan.

The Internet company said on Wednesday that is abandoning its plan to spin off its 384 million shares of Alibaba into a separate company. Instead, Yahoo will do a “reverse spin-off” of everything else it owns aside from the Alibaba stake and turn those businesses into a new company, leaving behind the Alibaba shares to trade on their own.

The question is, how is this different, or better, than the original plan? It may not be.

Yahoo seems to think the new plan will save the company a lot of money. The big problem with the Alibaba (BABA) spin-off plan was that it could have left Yahoo (YHOO) with a big tax bill, perhaps as high as $10 billion on its appreciated stake in the Chinese e-tailer. Companies are allowed to spin-off divisions tax free, but only if they are spinning off an operating company. Investors were nervous that a company made up of mostly Alibaba shares wouldn’t qualify as an operating company. The IRS declined to guarantee the transaction would be tax free.

Spinning off Yahoo’s core Internet business seems to avoid that problem. But not quite. That’s because, according to IRS rules, both the division being spun off and the division staying behind must be real operating companies to qualify for the tax exemption. So if the IRS had a problem with the Yahoo split before, it still will. The difference is that Yahoo will now have to pay taxes on the value of its Internet business and its Yahoo Japan stake, which is also part of the new spin-off. Independent tax expert Robert Willens says Yahoo’s new deal could have a tax bill of around $3 billion, which is $7 billion less than what it would have to pay if it stuck to its original plan.

Investors, though, don’t seem to think the new Yahoo plan will save the company $7 billion. In fact, shares of Yahoo were down nearly 4% on Wednesday, meaning shareholders think the company is worth $1.5 billion less, not $7 billion more.

All of this suggest that investors think even less of Yahoo’s core business, which they will be getting in the new spin-off plan, than previously thought.

Here’s the math: Yahoo owns 384 million shares of Alibaba. At Alibaba’s current $83 a share, that’s worth $32 billion. Yahoo also owns about $8.5 billion worth of Yahoo Japan. If you assume Yahoo will pay $3 billion in taxes, based on its current market cap of $32 billion, then Yahoo’s core internet business is now valued by the market at negative $5.5 billion. If you assume the old plan had a $10 billion tax bill, then the market value of Yahoo’s core business is slightly positive.

The drop could be the result that investors are sick of waiting, even if Yahoo, which still generates over $1 billion in cash flow a year, seems to be undervalued. Yahoo said it will take another year before its new split up plan is complete. It’s also possible investors could be finally throwing in the towel on Yahoo CEO Marissa Mayer, who seems to have bought herself more time at the top of the company with the new plan. What’s more, if you thought Yahoo’s business was going to be sold for a few billion, the fact that it will now live on as a separate company could be a disappointment.

Whatever the reason, Yahoo has problems that go far deeper than taxes.