Yahoo caught short by Alibaba’s mystery rejig

May 13, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By John Foley

Yahoo’s history with Alibaba Group was fractious even before the Chinese Internet group tried and failed to buy out its U.S. partner’s stake last year. Now they have something new to argue over. Yahoo says Alibaba reshuffled the unlisted group’s online payment system into a new vehicle controlled by founder Jack Ma without first agreeing the terms of the rejig. This will do nothing to salve the relationship.

There is apparent logic behind the move. Under new rules issued by China’s central bank, payment processors like Alipay must be licensed by Sept. 1. Foreign-invested businesses get a different set of rules — but these haven’t yet been codified. Rather than be caught without a licence and risk value-destructive down-time, it seems Alibaba took evasive action, popping Alipay into an all Chinese-owned vehicle.

That might not be a bad solution, had the price and contractual terms of the transfer been decided. Yet talks over how Alibaba’s group companies use Alipay, and the question of how much Alibaba will receive for parting with Alipay, are still in their infancy. More astonishingly, the transfer actually took place in 2010, according to a person familiar with the situation.

Putting Alipay in a different box leaves room for conflict. Alibaba’s e-commerce platform Taobao, which has around 80 percent of the market, can’t operate without it. That potentially gives Ma and his co-investors considerable leverage should they choose to charge the bigger group a fee, or offer a low-ball sum for the payment business.
Indeed, calculating what Alipay is worth is no simple task. Analysts value it at anything from $1 billion to 10 times that. While Yahoo shareholders carved off $1.8 billion on news of the transfer, suggesting a value of $4.2 billion given its 43 percent share, the fall in the shares of fellow Alibaba Group shareholder Softbank pointed to somewhere closer to $2 billion overall.

Two things, though, come through loud and clear. First, the relationship between Yahoo and Alibaba is not in great shape. This latest twist is unlikely to make it any better. Second, Yahoo is tying up a lot of its market value in a company it doesn’t control, and maybe doesn’t even influence. Its stake in Alibaba is worth perhaps $9 billion out of a total market capitalization of $24 billion. A clean break looks ever more appealing.

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