Evercore ISI Downgrades Yahoo, Says It's 'Reexamining' Alibaba SpinCo Tax Efficiency

In a report published Wednesday, Evercore ISI analysts downgraded the rating on

from Buy to Hold, while reducing the price target from $55 to $48, ahead of the spinoff of

. Remarks by an IRS official last week has raised questions related to the tax-efficiency of the Alibaba spinoff by Yahoo. In the report Evercore ISI noted, "With less than five percent of the SpinCo value comprised by Yahoo's selected ATB (Yahoo Small Business), we suspect the hurdle for establishing a legitimate corporate business purpose will be higher. Moreover, since the Treasury began its rhetoric around inversion, which we believe provides us with some read, we count 10 transaction withdrawals out of 13 with only two new deals since announced." The three transactions that did conclude exhibited only a small tax benefit. Against the backdrop of heightened IRS scrutiny, not only will the Alibaba spin face greater regulator attention, but Yahoo's 35 percent stake in Yahoo! Japan would also be impacted. While Yahoo does have other alternatives for tax recourse, the analysts believe that an alteration in the course at this stage would "prolong the application process into next year and possibly beyond." This could distract the company from its core turnaround efforts and "possibly even undermining management's enthusiasm for buyback," the analysts added.