Alibaba May Buy Its Biggest Investor Yahoo

By Douglas Macmillan and Bei Hu - Oct 3, 2011 10:33 AM GMT+0700
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Yahoo! Inc. signage is displayed in the lobby of the company in Santa Clara, California, U.S. Photographer: Tony Avelar/Bloomberg

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Jack Ma, chairman of Alibaba Group Holding Ltd. Photographer: David Paul Morris/Bloomberg

Six years after Yahoo! Inc. paid more than $1 billion to become the biggest investor in Alibaba Group Holding Ltd., it’s now a potential takeover target for the Chinese Internet company.

“We are very interested in Yahoo,” Alibaba Chairman Jack Ma said at a Stanford University event near Palo Alto, California, on Sept. 30. Talks have snagged over “political issues,” rather than financial ones, he said.

Yahoo, which fired Chief Executive Officer Carol Bartz last month, owns 40 percent of Alibaba and a deal would give Ma more control over the Hangzhou-based e-commerce company he founded 12 years ago. Since Yahoo bought the stake, it’s been eclipsed by Google Inc. (GOOG) as a U.S. search engine, while China’s Internet users have risen fivefold to almost 500 million.

“Jack has a strong desire and motivation to take over Yahoo to regain control of Alibaba’s destiny,” said Duncan Clark, chairman of telecommunications consulting firm BDA China. “Yahoo at the moment is rudderless in the wake of the ousting of Carol Bartz, and years of declining market share.”

Ma’s existing relationship with Yahoo may give him an advantage in putting a deal together, Clark, who hosted the Stanford Graduate School of Business event where Ma spoke, said in an e-mail. The alternative would be to watch Yahoo “slide into irrelevance,” he said.

Reviewing strategic options

Yahoo is reviewing strategy and seeking a new CEO after ousting Bartz, who failed to reverse a growth slowdown or repel competition from Google and Facebook Inc. The process for reviewing strategic options is likely to take “months, not weeks,” according to the memo, which was signed by co-founders Jerry Yang and David Filo and Chairman Roy Bostock.

As of mid-September, private-equity investor Silver Lake was considering a bid for Yahoo, people involved in the deliberations said at the time. As part of a deal, Silver Lake would sell off Yahoo’s Asian assets and then attempt to turn around the main operations or find a buyer for that business, the people said. Representatives from Silver Lake have approached other companies to gauge interest in purchasing Yahoo’s main business, one person said.

Alibaba, also part-owned by Japan’s Softbank Corp. (9984) and Singapore’s Temasek Holdings Pte, is expanding in search-engine services after dominating China’s e-commerce market. In 2009, Its Hong Kong-listed Alibaba.com Ltd. (1688) unit acquired two U.S. companies to step up international expansion.

“We are very interested in Yahoo because our Alibaba Group is so important to Yahoo, and Yahoo is also very important to us,” Ma said, when asked if he would buy the company. “There are so many people who are interested in that, and we are also talking to them.”

Dana Lengkeek, a spokeswoman for Sunnyvale, California- based Yahoo, declined to comment.

Yahoo rose as much as 76 cents, or 5.8 percent, in late trading on Sept. 30. Before the remarks, the shares had fallen 25 cents to $13.17 on the Nasdaq Stock Market. The stock is down 21 percent this year, giving the company a market value of $16.6 billion.

A share sale last month to investors including DST Global, Silver Lake and Temasek valued closely held Alibaba at $32 billion, two people with knowledge of the deal said then.

In 2005, Alibaba Group sold a stake of about 40 percent to Yahoo for $1 billion and ownership of Yahoo’s Chinese unit. Closely-held Alibaba Group now operates e-commerce businesses including Alibaba.com and Taobao.com, in addition to Yahoo’s local website.

Yahoo’s stake in Alibaba is worth $11.45 a share, according to estimates by Thornburg Investment Management in August.

Yahoo in ‘Limbo’

“Anyone who buys Yahoo would have to deal with the 40 percent stake in Alibaba Group, and that adds to uncertainty to Jack’s own role in the group” Li Muzhi, an analyst at Mizuho Securities in Hong Kong. “With Yahoo in the ‘limbo’ state, he feels safe.”

Yahoo’s shareholders would be hard pressed to find a more credible buyer than Alibaba, according to Clark.

Financial investors have a tendency to hire “miracle worker” CEOs to fix the companies they buy, only to fire them a few months or years down the way if they fail to live up to expectations, as seen at Yahoo and Hewett-Packard Co., Clark said.

“Despite the obvious cultural hurdles, to some extent, it would be hard for Alibaba to do a worse job than previous management at running Yahoo which had been reduced from a pioneering company to a follower,” Clark said.

China Talent Pool

Alibaba has access to China’s engineering resources and talent pool, he said. Buying Yahoo would give Alibaba access to consumers in the U.S., where it already made two acquisitions in the business-to-business services field, Clark said.

Ma said he’s interested in all of Yahoo and that discussions are proving thornier than he initially expected.

While it’s hard to see how the congressional Committee on Foreign Investment in the U.S. could credibly block Alibaba’s purchase of an “iconic” company, “anything is possible” as the U.S. enters an election year, Clark said.

When Yang was CEO in 2008, before Bartz was hired, Yahoo spurned a $47.5 billion offer by Microsoft Corp. (MSFT) The two companies later struck an agreement to outsource Yahoo’s search technology to Microsoft, diminishing the chance of a takeover.

Alipay Dispute

Alibaba reached an agreement in July with Yahoo, following a four-month dispute initiated after Alibaba transferred Alipay -- China’s most popular online-payment service -- to a Chinese company controlled by Ma. Under the accord, Alibaba will get at least $2 billion in the case of an initial public offering or “other liquidity event” at Alipay.

Ma’s role in the Alipay dispute may make it more difficult for his company to acquire Yahoo, said Laura Martin, an analyst at Needham & Co. in Los Angeles.

“Jack Ma has damaged his credibility in American capital markets by his transfer of Alipay,” said Martin, who has a “buy” rating on shares of Yahoo and doesn’t own the stock. “With him, I’d get the cash at closing. You never know what you’re going to end up with.”

To contact the reporters on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net; Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net