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(Reuters) - 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 the 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.
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 another 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 were down 5.8 percent to $15.19 in afternoon trade.
"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 exchange of Yahoo's slices of Alibaba and Yahoo Japan back to those companies, in return 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.
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.
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 years before.
Writing By Edwin Chan; Editing by John Wallace, Richard Chang and Bernard Orr