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There may be no bidders for Yahoo. Here's why

Kaja Whitehouse
USA TODAY

Corrections & Clarifications:  An earlier version of this story incorrectly spelled Scott Levine’s name.

It was reported that the Yahoo board has approved a massive $1.1 billion deal to buy New York-based blogging platform Tumblr May 19, 2013.

NEW YORK — Tax issues could once again undermine Yahoo's next steps.

Yahoo last week said it would be open to selling its core Web assets, like its email and online search, if the right bidder came along. But tax experts warn the company's talk of making those assets into a new company through a tax-free spin-off could have a chilling effect on interested buyers — one that may have already started.

"It acts in some ways like a poison pill — like a tax poison pill — to stop potential suitors from talking to them until the spinoff is complete,” said Scott Levine, a tax lawyer at Jones Day, of the affect tax-free spinoffs can have on merger activity.

At issue is a rule that could penalize anyone who holds substantial negotiations to buy a company within two years of a tax-free spinoff. The penalty for trying and failing is at least a six-month waiting period after the spinoff is complete to try again, or the parent company suffers a tax hit.

As a result, tax lawyers say they would probably advise their corporate clients to stay away until Yahoo either makes a decision to abandon the tax-free spinoff, or until the spin is over and done with.

On Wednesday, Yahoo Chairman Maynard Webb said the Internet company would explore moving forward with a tax-free spinoff in order to unlock the value of Yahoo's core Web assets, which are currently being overshadowed by Yahoo's 15% stake in Chinese e-retailer Alibaba.

Webb also suggested the board was open to selling Yahoo's Web assets, which are struggling to compete for ad revenue.

"The board has a fiduciary obligation to engage with any legitimate person that comes forward with a good offer," Webb told CNBC. The board would not "proactively" seek out bids, he said.

Tax issues have clouded Yahoo's next steps for months. Investors had pushed Yahoo to spin off its $30-plus billion stake in Alibaba, until the IRS signaled the share spinoff could get taxed, whittling its value down to $20 billion.

In Yahoo's latest plan, experts say that mere talk of a tax-free spinoff could dramatically limit the number of potential suitors to approach Yahoo.

As with anything tax related, there are exceptions. Companies may feel free to test Yahoo's interest in a sale without running afoul of the I.R.S.. And any bidder who really wants to buy Yahoo's core web businesses, like Yahoo Mail or Yahoo Sports, can always just push ahead.

But the risks of doing that can be great when there is a lot of competition looking to buy the same assets, experts said.

"If someone comes in, bids now and fails, they may be blocked from bidding on Yahoo for at least a period of time after the spinoff," said Jay Singer, a tax lawyer with Ivins, Phillips and Barker.

That would put them at a competitive disadvantage to other bidders, said Singer. "It's a gamble," he said.

Of course, Yahoo shareholders may also seek to force the company to put its assets on the auction block.

Doubts rise over Yahoo's spinoff plan, raising specter of proxy war

Hedge fund Starboard Value has said it would like to see Yahoo sell its struggling core business sooner rather than later. Starboard has been known to battle for board seats at other companies, such as Darden Restaurants, the owner of Olive Garden.

Yahoo's entire board comes up for re-election next summer, and the period for nominating directors ends in March.

Yahoo, through a spokeswoman, declined to comment on the spinoff plan beyond the statements it has already made.

Follow USA TODAY reporter Kaja Whitehouse on Twitter: @kajawhitehouse

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