(Reuters) - Activist investor Starboard Value LP asked Yahoo Inc to drop plans to sell its stake in Alibaba (N:BABA) Group Holdings Ltd due to tax concerns, and instead urged the company to sell its core search and display advertising businesses.
Yahoo's current net cash holding and the funds raised from a sale of the business could be returned to shareholders through buybacks and dividends, Jeff Smith, Starboard's head, said in a letter to Yahoo on Thursday.
Starboard, calling itself a "significant shareholder" in Yahoo, said it made the letter public as efforts to talk with the company privately over the past year had not yielded positive results.
The hedge fund had supported the sale of Yahoo's stake in Alibaba, worth more than $20 billion, before the U.S. Internal Revenue Service in September denied a request for a private letter ruling on whether the spinoff would be tax free.
Yahoo's shareholders may have to pay about $9 billion in taxes if the IRS denies the tax-free status after the sale, which is expected to close in the current quarter.
"If you stay on the current path, we believe the potential penalty for being wrong is just too great, and the potential reward for being right is not materially better than the other alternative," Smith said.
Yahoo, whose shares were up flat premarket on Thursday, was not immediately available for comment. Alibaba was also flat.
Starboard, which has recently agitated for change at Advance Auto Parts Inc and Brink's Co, said Yahoo had snubbed its requests to appoint Smith as a board member at least four times in the last four months.
"I think the investors are not particularly likely to give a lot of credit to the board of Yahoo, as it stands now," Pivotal Research Group analyst Brian Wieser said.
"It wouldn't be a very hard proxy fight for Starboard if they go down that path."
Yahoo's search and display ad businesses, which account for a lions shares of total revenue, has been struggling and Chief Executive Marissa Mayer's efforts to revive the business has made little progress.
Many analysts attribute little or no value to the business and say Yahoo's worth – about $31 billion as of Wednesday's close – lies in its Asian assets: the Alibaba stake and a 35 percent stake in Yahoo Japan Corp.
The Wall Street Journal had reported Starboard's plans earlier on Thursday.