Yahoo’s pay troubles

Bartz: time for a trip to Hangzhou?

“In her two and a half years as Yahoo chief executive, Carol Bartz has never visited Hangzhou, the head office of Alibaba”.

For the Wall Street Journal, that is a pretty astonishing revelation, given Yahoo holds a 43% stake in the Chinese internet firm. But industry insiders go further and speculate that Bartz and Jack Ma, chairman of Alibaba, are not even on talking terms.

That begs the question: why fly to Hangzhou for the silent treatment?

Certainly, relations sound less than cordial, with Yahoo announcing early last week that it had been blindsided by an Alibaba move to transfer ownership of its Alipay online payments business to a domestic company controlled by Ma.

The US firm then clarified that it first heard of the transfer back in March, although it claimed that it had occurred “without the knowledge or approval” of Alibaba’s board or shareholders.

A few hours later, Alibaba had issued a rebuttal, saying the board – which includes representatives from Yahoo – was told in July 2009 that the “majority shareholding in Alipay had been transferred into Chinese ownership.”

Why the ownership transfer? Alipay’s service boasts a 49.8% share of China’s online payments market, making it a valuable proposition. But Alibaba has said that it has no choice but to shift ownership to an entity controlled by Ma in response to rules issued last year by the People’s Bank of China.

The regulations bar foreigners from owning controlling stakes in Chinese internet payment services, (see WiC66). And Alibaba is majority-owned by foreign shareholders – aside from Yahoo, Softbank of Japan also owns 30% of the firm.

Whichever version is true, investors say the way Yahoo has handled the situation suggests that the tech giant is losing control of its stake in Alibaba.

“It seems like this thing has evolved into a he-said, she-said battle via press releases,” Eric Jackson, founder of Ironfire Capital, a China technology-focused hedge fund and a Yahoo shareholder, told the Wall Street Journal.

“It doesn’t make the Yahoo board look like they were on top of things. It’s hard to believe that such an important relationship could be handled so poorly.”

Investors then punished Yahoo’s stock wiping out more than $2 billion in market value. Many of them fret that Alibaba might make similar moves to dilute Yahoo’s stake at holding company level, which is said to be worth as much as $10 billion.

Industry observers are less surprised by the turn of events. Yahoo and Alibaba have been caught in an increasingly loveless marriage in recent years amid differences over censorship and business issues. WiC reported in issue 79 that Alibaba had repeatedly approached Yahoo to buy back some of its shares, but that Yahoo had rejected the deal.

After trading barbs for a week, Alibaba and Yahoo then tried to patch things up. On Sunday, the companies came together to release another statement, saying that they were both “committed to productive negotiations to resolve the outstanding issues” on Alipay.

Ma also weighed in on the dispute personally. At a shareholder meeting for Alibaba.com, Alibaba’s business-to-business platform, he insisted the Alipay ownership transfer was “100% legal and 100% transparent”.

“We would not do something underhanded or secretive that we have to keep from the board of directors,” Ma said. (As reported in WiC96, Ma has a name among Chinese bosses for the emphasis he gives to company reputation).

Bartz herself will also need to do more to build a constructive relationship with Ma. Yahoo’s holding in Alibaba is integral to Yahoo’s own stock price. When hedge fund manager David Einhorn decided to take a long position in Yahoo stock earlier this month, he said the Alibaba stake alone could “ultimately be worth Yahoo’s entire current market value.”

Perhaps a trip to Hangzhou is in order, after all.

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