Yahoo, Alibaba in Slow-Motion Divorce 雅虎和阿里巴巴踏上漫漫离婚路

By newsdoug on May 21, 2012

Alibaba on cusp of partial buyback

UPDATE: Since writing this post this morning, Alibaba and Yahoo have announced an actual deal, whose terms are largely the same as those described below. Congratulations to both sides for finally reaching a deal!

It looks like I was wrong in predicting that the latest shake-up at the top of Yahoo (Nasdaq: YHOO) might derail its advanced discussions to sell back some or all of its stake in Alibaba to the Chinese e-commerce leader, with media now reporting that a deal is imminent that looks smart for Yahoo but also somewhat messy. To recap quickly, Alibaba has been trying for more than a year to buy back the 40 percent of itself that Yahoo purchased in 2005 when the 2 sides thought they could become good strategic partners. That relationship never really materialized and the situation became rather acrimonious instead, leading the 2 sides to pursue their divorce with talks that began last fall. After a false start due to unrealistic expectations by both sides, talks resumed a couple of months ago and it looked like the 2 sides might finally reach a deal. But then recently named CEO Scott Thompson abruptly had to resign last week after false claims were discovered in his resume, prompting me to say the departure could derail any progress in the latest buyback talks. (previous post) Now it seems the buyback talks must have been far more advanced than I realized, and that the Yahoo board wants to conclude a deal to give as a present to the new CEO who will eventually fill the spot vacated by Thompson’s abrupt departure. Media are saying that under the deal that could be announced as early as later today, Yahoo would only sell back half of its current Alibaba stake, or about 20 percent of the company for $7 billion, and retain the remaining 20 percent for the moment. Alibaba would then pursue an IPO in the next 18 months, at which time Yahoo would sell down half of its remaining stake, or about 10 percent of Alibaba, into the offering. (English article) Yahoo’s motivation for structuring the deal this way is relatively clear, though it looks a bit messy to me from Alibaba’s perspective. But Yahoo is clearly in the position of strength in these discussions since it’s the one holding the 40 percent Alibaba stake, and thus Alibaba has limited leverage to get what it wants out of a deal. From Yahoo’s perspective, the initial sale of 20 percent will instantly give it a nice cash infusion of $7 billion, and also show the world that its remaining Alibaba stake is worth another $7 billion or more, valuing Alibaba itself at a tidy $35 billion. That could help to quickly boost Yahoo’s laggard shares, which now value the company at just $18 billion, by boosting expectation that the company could soon use its new cash infusion to pay a dividend. What’s more, Yahoo could get more cash for future dividends if Alibaba can boost its valuation by the time of its IPO, which looks likely as the company is China’s e-commerce leader and most of its businesses are quite profitable. From my personal perspective, this deal doesn’t look too attractive since I really think these 2 companies need to get completely divorced, the sooner the better, so that each can move ahead with developing its business without unneeded distractions. But since neither Yahoo or Alibaba is asking me what I think, we’ll just have to proceed with this slow-motion divorce and eagerly await the day when these 2 companies with a stormy past finally complete their separation once and for all.

Bottom line: Yahoo’s imminent signing of a buyback deal with Alibaba looks like the beginning of a long and potentially messy divorce that will mostly benefit Yahoo.

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