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NEW YORK (Reuters Breakingviews) - Yahoo will soon be little more than a holding company for stakes in Alibaba and Yahoo Japan. The $52 billion internet firm's shareholders on Thursday approved the sale of its operating businesses to Verizon Communications for $4.5 billion. The long-standing wrinkle, though, is that Yahoo bought the minority holdings so cheaply that essentially the entire value of both would be taxable in the United States if it sold them. That means the company is, at least in theory, now a proxy for where investors think U.S. corporate tax rates are going.
As of now, they seem to be skeptical about President Donald Trump's ability to work with Congress to reform the tax system so that companies pay as little as 15 percent on their profit. Take Yahoo's market value, strip out nearly $7 billion of net cash and the value of what Verizon is buying, and the after-tax worth of the two Asian stakes is roughly $41 billion, according to a new Breakingviews calculator (see graphic tmsnrt.rs/2rRE6UL).
The full market value of Yahoo's Alibaba stake is around $54 billion, while the Yahoo Japan holding is worth $9 billion. So investors seem to be factoring in a 35 percent tax hit. That exactly matches the rate currently in force, not Trump's preferred figure or even the 25 percent that has been put forward by House Republicans. The implication is that shareholders are attaching a very low probability, and perhaps also a long wait, to any meaningful reduction in America's company tax rate.
Looked at another way, those who believe Trump will achieve significant tax reform in the near term should perhaps fill their boots with Yahoo stock. After all, if the tax rate were slashed to 15 percent, that would in theory boost the after-tax value of the two big overseas stakes by over $12 billion, by Breakingviews' math, potentially pushing the company's shares up nearly a quarter from their closing price on Friday. For anyone who made the bet, that might truly count as making America great again.