Like many estranged couples, Alibaba and Yahoo’s road to divorce has been a long and painful one. But the two firms, stuck in a loveless embrace for years, have finally agreed to part ways. Yahoo announced on Monday that it has reached a deal to sell its 40% stake in the Chinese company back to Alibaba Group, with the first tranche netting the US firm $7.1 billion.
A quick recap: Alibaba has long been trying to buy back the 40% stake that Yahoo purchased in 2005 when the two sides thought they could become strategic partners. That relationship never really materialised and the situation became more acrimonious once Jerry Yang, co-founder of Yahoo, stepped down.
Negotiations were renewed after Yahoo fired Carol Bartz, the former chief executive, last year. Still, there always seemed to be something – disagreements over break-up fees, the value of the stake and other sticking points – that bogged down discussions.
But no matter. On Sunday night, the two sides announced an agreement that will allow for a more amicable separation.
The deal, however, is anything but straightforward: the first step will see Yahoo sell half of its stake for $6.3 billion in cash and some $800 million in newly issued Alibaba shares.
The second part of the deal depends on when Alibaba goes public. But the agreement dictates that at the time of an IPO, Alibaba will be required to either buy back a quarter of Yahoo’s current stake or let Yahoo sell the shares. Underlying the terms is the assumption that the Chinese company is worth at least $35 billion.
Although Jack Ma, Alibaba’s chairman, has long downplayed rumours of an IPO, the agreement with Yahoo seems to be pushing the e-commerce giant in that direction. If so, an Alibaba IPO could turn out to be even bigger than the flotation of Facebook (and hopefully accomplished with a little more aplomb than last week’s Nasdaq listing debacle).
“As e-commerce in China continues to grow, Alibaba is a very attractive asset,” says Duncan Clark, chairman at BDA China, a technology advisory firm. “Alibaba is in a better position now to do an IPO. The competitive pressures are increasing, and the need to reward staff and make acquisitions means it’s helpful for them to list.”
Ma has every reason to be pleased. He now has a freer hand as Yahoo has also agreed to give up its option for an unfilled fifth board seat and some of its voting rights. Beleaguered Yahoo also has some reason to celebrate, having spent $1 billion on a stake that will now deliver a multi-billion dollar windfall. The problem is that selling its Alibaba stake means Yahoo faces being left with the rump of its poorly performing US operations. And the Shanghai Daily couldn’t miss an opportunity to take a jab, calling the deal a “lifeline” for the “struggling internet company”.
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