Tuesday, May 22, 2012

Yahoo sells half of its Alibaba stakes

Internet Company Yahoo Inc has decided to sell half of its stake in the Chinese e-commerce group Alibaba for $7.1 billion back to Alibaba. Yahoo had purchased 40% stake in Alibaba in 2005, half of which (20%) is being sold back to the company. Alibaba will pay $6.3 billion in cash and remaining in preference shares. Most of the sale proceeds will be transferred to the shareholders.

Alibaba is a major player in the Chinese internet market, which currently holds the number one spot as the ‘world’s biggest internet bazaar’. Its strength comes from its Chinese online marketplace “Taobao” which is host to approximately 90% of Chinese consumer-to-consumer online trades and 53% of business-to-consumer trades.

Yahoo had purchased 40% stakes in Alibaba for $1bn in 2005. According to recent estimates, the value of the stake is currently around $14bn. Half of the 40% shares are being sold now while the remaining will be sold in different stages in subsequent years. Alibaba’s founder and CEO Jack Ma was quoted as saying that the deal “enables Alibaba to take our business to the next level as a public company in the future.”

Analysts are predicting an IPO of Alibaba’s shares in the future, by December 2015. If this were to happen then either
i)                 Alibaba will buy back further 10% of its shares from Yahoo and will go to the stock market for IPO or
ii)                Alibaba will not buy back anymore shares and will allow Yahoo to conduct an IPO.

It has been a rough couple of years for Yahoo as it faces severe competition from Google and Facebook. Its revenues have plummeted as the company has replaced one CEO after another. Almost exactly four years ago, in May 2008, Yahoo’s shares were soaring at $33 per share and Microsoft had shown interest in buying the business for $47.5bn, an offer which Yahoo declined. The board might regret their decision now as the company shares trade around $15 per share as it receives criticism from shareholders.

Earlier this month, Yahoo CEO Scott Thompson was forced to resign when it was revealed that he had mentioned a ‘fake degree’ in his official CV.

Your comments and feedback are always appreciated.
Sarfaraz A.K.
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