Monday, May 16, 2011
In early May 2011, the picture of the investment Yahoo! made in Alibaba changed dramatically with the announcement that Alipay, Alibaba's version of PayPal, was taken private by Alibaba Chief Executive Officer Jack Ma. Industry analysts estimate Alipay accounts for approximately $1.7 billion of Yahoo!'s $24 billion market value.
When Yahoo! made its investment in Alibaba, there were three parts to its growing e-commerce retail empire: Alibaba.com, an e-business platform for buyers and suppliers doing business in China and owner of e-commerce solutions providers Vendio Services Inc. and Auctiva.com; Taobao, Alibaba's online retail website that boasts more than 800 million products listed and more than 370 million registered users; and Alipay, the online payment platform, that has over 550 million registered users, processes approximately 8.5 million transactions daily, and partners with major credit card companies and all of China's national banks.
It's also commonly reported there is friction between Yahoo! and Alibaba. Yahoo! turned control of Yahoo! China over to Alibaba when it bought into the holding company. There are reports Yahoo! is unhappy that the number of hits on its search engine have dropped dramatically in China since the deal with Alibaba was concluded.
In January 2010, Yahoo! sided with Google Inc. against the Chinese government in an argument over censorship and cyber attacks. Last fall, Yahoo! conceded its Hong Kong site (an entertainment and information portal for the Chinese protectorate) was soliciting advertising business in Mainland China. The relationship did not improve when eBay and Alibaba signed a deal allowing customers of Alibaba's shipping arm, Aliexpress.com, to make payments on PayPal.
As a result of incidents like these and Alibaba's growth potential, there are repeated stories that Alibaba would like to buy back the stake sold to Yahoo!.
On May 10, 2011, Yahoo! mentioned in a Securities and Exchange Commission filing that Alipay has restructured so that 100 percent of Alipay's outstanding shares are held by a company controlled by Alibaba CEO Ma. The reaction of some analysts is that the Alipay restructuring is an attempt by Ma to leverage Yahoo! into selling back its stake in Alibaba. Yahoo!'s official explanation is the restructuring will speed a governmental licensing process for Alipay.
"To expedite obtaining an essential regulatory license, the ownership of Alibaba Group's online payment business, Alipay, was restructured so that 100 percent of its outstanding shares are held by a Chinese domestic company which is majority owned by Alibaba Group's chief executive officer," Yahoo! said in its SEC filing. Yahoo! added it is negotiating with Alibaba "regarding the terms of the restructuring and the appropriate commercial arrangements."
Alibaba did not respond to a request for comment. However, Yahoo! spokeswoman Dana Lengkeek told The Green Sheet, "Alipay is required to obtain a license from the People's Bank of China to operate its payment business. Alipay was restructured to expedite getting the license."
The People's Bank of China recently introduced new rules requiring payment processors be licensed. It's possible the license could be delayed if Alipay remained, in part, foreign owned.
Together, Yahoo! and the Japanese company Softbank Corp. own 72 percent of publicly traded Alibaba. It is not known if either entity was aware of the Alipay restructuring at the time it occurred sometime last year. The Wall Street Journal reported May 13, 2011, that Yahoo! claimed it didn't know of the transfer of Alipay to Ma's privately held company until March 31, 2011. The news outlet also noted that Alibaba said its board, on which Yahoo! executive and cofounder Jerry Yang sits, discussed the restructuring as early as July 2009.
Yahoo! stock dropped $1.35, or 7.3 percent, after the announcement of the Alipay restructuring. The announcement, and the subsequent fall in the stock price, arrived just a week after Yahoo! stock hit its highest point in a year when investor David Einhorn's Greenlight Capital hedge fund disclosed a "significant" long position in Yahoo!.
When he announced the Yahoo! investment, Einhorn wrote to investors, "We believe that Yahoo!'s most valuable asset is its 40 percent stake in Alibaba Group's still-private holdings, which are separate and distinct from its ownership in the publicly-traded Alibaba.com, which we are essentially getting for free.
"Among Alibaba Group's privately held Chinese Internet assets is a company called Taobao, which is the leading e-commerce website in China. More merchandise was sold on Taobao last year than on eBay, and Taobao's merchandise sales are growing 100 percent annually. We would not be surprised if Yahoo!'s 40 percent stake in Alibaba Group alone was ultimately worth Yahoo!'s entire current market value." 
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