Long-awaited Yahoo deal heaps pressure on Alibaba

By Wei Gu
May 21, 2012

By Wei Gu

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

Alibaba has finally reached a truce with Yahoo. The Chinese e-commerce giant is offering at least $7 billion to buy back its own shares from the U.S. internet group, recapturing half the stake Yahoo acquired in 2005 for $1 billion. The timing is good, since Facebook’s IPO has left cashed-up investors who could help finance the deal. But a successful outcome will heap pressure on Alibaba.

Yahoo is making some compromises in giving Alibaba what it has long wanted. The new deal will expose it to a hefty tax bill – something it had hoped to avoid. Yahoo will also give up one of the two seats it currently holds on Alibaba Group’s four member board. Still, the U.S. group will keep some upside from Alibaba shares, by holding on to half of its 40 percent stake until Alibaba eventually lists its shares.

Alibaba too is taking the rough with the smooth. It has agreed to value itself at a minimum of $35 billion, compared with the $32 billion at which it sold shares in 2011. The final price, which will be decided by a sale of Alibaba shares, may be higher. Moreover, it must come up with at least $6.3 billion in cash in the next six months. That comes just months after it borrowed $3 billion from a group of six banks to privatise its B-to-B e-commerce portal, Alibaba.com.

Facebook’s recent initial public offering has probably helped, by creating substantial new wealth among Internet investors. Russia’s Digital Sky Technologies, which participated in Alibaba’s last round of fund raising in 2011, is one. It just sold $1.6 billion worth of shares in the U.S. social media giant. Others who invested in Alibaba in the past, such as Singaporean state investor Temasek, may also be interested.

Once the money is raised, Alibaba founder Jack Ma must deliver growth to justify its valuation. The $35 billion at which it must raise finance is equivalent to 130 times 2011 net profit, compared with 31 times for Tencent and 45 times for Baidu, China’s two biggest internet companies by market capitalisation. Moreover, new investors are likely to one day want an exit. In closing the door on the Yahoo saga, Ma may be saying “open sesame” to another.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/