Talks between Yahoo Inc and China's Alibaba over the U.S. Internet giant's Asian assets have hit an impasse, throwing their plans for a $17 billion tax-free asset swap into question, according to sources briefed on the situation.

The snag in the negotiations came on the same day that activist investor Daniel Loeb, of hedge fund ThirdPoint, launched a campaign to install his own slate of directors on Yahoo's board, further highlighting the turmoil engulfing the one-time Web pioneer.

Loeb, who has adamantly opposed Yahoo's previous efforts to strike a minority investment deal with private equity firms, disclosed plans to nominate former NBC Universal Chief Executive Jeff Zucker, along with himself and two others, for Yahoo's board in a regulatory filing with the Securities and Exchange Commission on Tuesday.

A collapse of the proposed Asian asset deal - referred to as a cash-rich split-off - would mark the latest setback for an erstwhile Internet leader struggling to turn its business around and appease unhappy shareholders.

Yahoo, which reported a 21 percent decline in revenue last year, appointed former PayPal President Scott Thompson as chief executive in January, five months after CEO Carol Bartz was fired over the phone.

One person briefed on the situation described the deal as effectively dead in the water following unreasonable terms sought by Yahoo during negotiations in Hong Kong.

But Yahoo appeared to see things differently. The company had not been informed that the tax-free deal was officially off the table, and it remained committed to continuing negotiations, according to a second source familiar with the matter.

Representatives from Yahoo and Alibaba Group declined to comment.

The sources said Yahoo and its Asian partners could still strike another, taxable, deal, though that remained to be seen.

Shares of Yahoo, which were down as much as 6 percent at midday on Tuesday, finished the regular session down 4.7 percent at $15.36.

I think the deal is either dead or it's going to take a lot longer to complete, which means we don't have a near term catalyst; hence the selloff, said Brett Harriss, an analyst with Gabelli & Co.

The deal would have seen the return of Yahoo's slices of Alibaba and Yahoo Japan back to those companies, in exchange for unspecified assets.

Investors had hoped that Yahoo, after years of foot-dragging, would finally arrange for the sale of its Asian assets, considered among the most valuable parts of its portfolio.

AllThingsDigital, which initially reported the snag in the negotiations on Tuesday, cited one source as saying discussions completely halted after negotiators from Yahoo - whose chairman, Roy Bostock, is due to step down and whose chief executive, Scott Thompson, is barely a month into the job - changed tack on what they wanted from the deal. The report gave no details.

It was unclear what exactly had caused the sudden impasse in negotiations, roughly two months after the various parties had agreed to basic terms for a deal.

A third source familiar with the talks said Yahoo's negotiators had a change of heart, though it was unclear why.

Over the last few days in Hong Kong, it became evident that they don't really have a desire to do this deal, that source said, dismissing speculation both sides might have split on valuation terms agreed upon in December. A cash-rich split appears to be toast.

Alibaba may now reach out to Thompson directly to see if Yahoo would explore a simpler - but taxable - direct buy-back of its stock.


The slightly different interpretations over the current state of the deal by people familiar with the matter raised the possibility that the public airing of the latest snag could be a negotiating tactic.

It could be a negotiating ploy by either side, or it really could be a breakdown in negotiations, said Gabelli's Harriss, noting that there was a fair amount of friction in the relationship between Yahoo and Alibaba.

Alibaba founder Jack Ma has tried to buy back the 40 percent of his company that is owned by Yahoo several times in recent years, only to be rebuffed by Yahoo.

The rocky relationship between the companies came to a head in May when it was revealed that Alibaba had abruptly handed Alipay - one of Alibaba's crown jewels - to a company controlled by Ma, apparently without Yahoo's knowledge.

I find it very hard to believe that Alibaba and Softbank will just walk away, said Ryan Jacob, chairman and chief investment officer of the Jacob Funds, noting that Alibaba in particular is very interested in regaining its shares from Yahoo.

If the companies can't agree on terms of a deal, Jacob speculated that Alibaba might team up with private equity investors in the United States and seek to acquire Yahoo outright. Such a move would allow Alibaba to regain its shares from Yahoo, while the private equity firms would likely take control of Yahoo's U.S.-based Internet business, he said.

Having U.S. partners just makes the most logical sense, because they're going to need help on financing, and in the long term they really don't want the core Yahoo business anyway, said Jacob, whose firm owns shares in Yahoo.

Analysts say Yahoo failed to take aggressive action in past years to reverse a decline in advertising revenue in the face of competition from Google Inc and Facebook, incensing shareholders who blamed the Yahoo board for waffling.

This month, Bostock announced he and three other directors would step down, following co-founder Jerry Yang out the door. Yang was excoriated for turning down a rich Microsoft Corp acquisition bid in 2008.

ThirdPoint's Loeb said the recently announced changes to Yahoo's board, including Yahoo's announcement of two new board members, do not put the company on the right track.

Yahoo fired back with a statement on Tuesday that it was disappointing that Loeb has chosen a potentially disruptive path, just as the company is moving forward under new leadership.

(Additional reporting by Nadia Damouni in New York, writing By Edwin Chan; Editing by John Wallace, Richard Chang, Bernard Orr Phil Berlowitz)