Yahoo’s $7.1B deal with Alibaba offers ray of hope

MICHAEL LIEDTKE

AP Tech­nol­ogy Writer

SAN FRANCISCO — After years of mor­ti­fy­ing mis­steps, Yahoo Inc. finally has some­thing to boast about: a multibillion-dollar wind­fall from a savvy invest­ment in China.

Yahoo is sell­ing half of its roughly 40 per­cent stake in Alibaba Group Hold­ing Ltd., one of the most suc­cess­ful com­pa­nies in China’s rapidly grow­ing Inter­net mar­ket. The $7.1 bil­lion price ensures that Yahoo will get a hefty return from its $1 bil­lion invest­ment in Alibaba in 2005.

The deal, com­ing a week after Yahoo’s CEO abruptly resigned over mis­state­ments in his offi­cial biog­ra­phy, will pro­vide more finan­cial fire­power for the lat­est regime try­ing to turn around the long-struggling Inter­net com­pany. It came after more than two years of nego­ti­a­tions on how Yahoo will sell the stake.

Alibaba started out in 1999 as a business-to-business web­site link­ing fac­to­ries in China to buy­ers around the world. It grew into a com­pany that’s larger than Yahoo, with more than 25,000 employ­ees work­ing at a wide range of web­sites and online services.

Alibaba’s port­fo­lio includes Taobao.com, China’s ver­sion of eBay, and TMall, which brand own­ers can use to sell directly to con­sumers. Alibaba also runs a search engine for shop­pers and an online pay­ment service.

Things have been going so well at Alibaba that it now accounts for a large por­tion of Yahoo’s earnings.

While Yahoo has prof­ited from the Alibaba invest­ment, Yahoo’s stock price has plunged by more than 55 per­cent since the com­pany invested in Alibaba.

Yahoo’s rev­enue has been steadily shrink­ing as rivals Google Inc. and Face­book Inc. devel­oped more prod­ucts to grab the atten­tion of Web surfers and attract more online advertising.

Alibaba is buy­ing back its stock from Yahoo to gain more con­trol of its own des­tiny, some­thing that CEO Jack Ma wanted, espe­cially as Yahoo became mired in its own inter­nal dis­ar­ray in recent years.

“The trans­ac­tion will estab­lish a bal­anced own­er­ship struc­ture that enables Alibaba to take our busi­ness to the next level as a pub­lic com­pany in the future,” Ma said in announc­ing the deal with Yahoo late Sunday.

The deal calls for Alibaba to raise the money needed to buy Yahoo’s stake within the next six months. Yahoo will get $6.3 bil­lion in cash and $800 mil­lion in a new class of pre­ferred stock in Alibaba, a pri­vately held company.

Yahoo also will license its brand and some of its tech­nol­ogy to Alibaba dur­ing the next four years as part of an arrange­ment that will include an upfront pay­ment of $550 million.

After taxes, Yahoo esti­mates it will receive $4.2 bil­lion just from the upcom­ing sale of half its Alibaba stake. Yahoo had been try­ing to work out a tax-free deal, but it wound up too com­pli­cated to pull off.

In a con­fer­ence call Mon­day with ana­lysts, Yahoo Chief Finan­cial Offi­cer Tim Morse hailed the out­come as a “home run” for Yahoo’s shareholders.

Yahoo will sell another quar­ter of its orig­i­nal invest­ment as part of Alibaba’s ini­tial pub­lic offer­ing of stock, expected by the end of 2015. Yahoo will then have the option of sell­ing its remain­ing hold­ings on the open stock market.

By stag­ger­ing the sale of its stake over sev­eral years, Yahoo con­ceiv­ably will make even more money if Alibaba is as suc­cess­ful as it has been in recent years. Alibaba is now worth an esti­mated $35 bil­lion, up from $2.5 bil­lion seven years ago.

Both Alibaba and Yahoo said they may col­lab­o­rate on other joint ven­tures in the future, despite the increas­ingly strained rela­tions between the com­pa­nies that con­tributed to more than two years of sometimes-prickly negotiations.

Yahoo intends to dis­trib­ute most of the pro­ceeds from its ini­tial Alibaba sale to Yahoo share­hold­ers, although its recently reshuf­fled board of direc­tors hasn’t decided yet how the money will be paid out. For now, the com­pany is adding $5 bil­lion to its pool of funds for buy­ing back its stock, rais­ing its total com­mit­ment to $5.5 bil­lion over an unspec­i­fied time frame.

The Alibaba wind­fall pro­vides a mea­sure of com­fort to Yahoo’s long-suffering share­hold­ers, many of whom still lament­ing the company’s squan­dered oppor­tu­nity to sell itself to Microsoft Corp. for $47.5 bil­lion, or $33 per share, in May 2008.

Yahoo’s stock was at $34.14 when Yahoo announced the Alibaba invest­ment in August 2005. It fell to $19.18 before Microsoft made its ini­tial bid, in Jan­u­ary 2008. Yahoo’s stock is now trad­ing at less than $16.

The Alibaba announce­ment couldn’t have come at a bet­ter time for Yahoo. A week ago, newly hired CEO Scott Thomp­son left after just four months because of fall­out from a bogus col­lege degree listed on his offi­cial biog­ra­phy. As part of the shake-up, the com­pany appointed a dis­grun­tled share­holder, hedge fund man­ager Daniel Loeb, along with two of his allies to the board of direc­tors, while accel­er­at­ing the exit of five other directors.

Morse described the tim­ing of the Alibaba deal as coin­ci­den­tal, but that didn’t stop ana­lysts from the­o­riz­ing that the com­pany is oper­at­ing with a new sense of urgency and direc­tion under the new board and interim CEO Ross Levin­sohn. His back­ground is more deeply rooted in Inter­net con­tent and adver­tis­ing than Thompson’s was.

Cit­i­group ana­lyst Mark Mahaney called the Alibaba deal as a “mean­ing­ful win” for Yahoo, while BGC Finan­cial Part­ners ana­lyst Colin Gillis is so encour­aged by the recent devel­op­ments that he believes Yahoo’s stock price can hit $20 within the next year, up from its pre­vi­ous tar­get of $18. Yahoo’s stock hasn’t touched $20 since Sep­tem­ber 2008 when the com­pany was still run by co-founder Jerry Yang. Levin­sohn is the fifth per­son to run Yahoo since then, count­ing an interim CEO stint by Morse.

Hav­ing been burned by the com­pany so many times, investors were less enthu­si­as­tic about the Alibaba break­through than most ana­lysts. The company’s shares gained just 16 cents, or 1 per­cent, to close Mon­day at $15.58.

“I am not sure peo­ple could have rea­son­ably expected a lot more than what they got out of this deal,” said Stan­dard & Poor’s Cap­i­tal IQ ana­lyst Scott Kessler. “There are far too many peo­ple who are too cyn­i­cal about the Yahoo story at this point.”

J.P. Mor­gan ana­lyst Dou­glas Anmuth believes investors are wor­ried about Alibaba’s abil­ity to raise the money needed to pay Yahoo. He says they are also dis­ap­pointed by the lack of clar­ity about when Yahoo will be buy­ing back its stock.

“This feels like the market’s just not will­ing to give Yahoo much credit until a deal is offi­cially done,” Anmuth wrote in a Mon­day research note.

Wedge Part­ners ana­lyst Mar­tin Pyykko­nen believes most investors real­ize the Alibaba wind­fall won’t solve the prob­lems that have been erod­ing Yahoo’s rev­enue, espe­cially because the money will be fun­neled to share­hold­ers instead of invested in acqui­si­tions or content-licensing deals that might help the business.

“This is really just a short-term fix,” Pyykko­nen said of the Alibaba sale.

Yahoo faces its biggest chal­lenge in the online adver­tis­ing mar­ket, where it has been los­ing mar­ket share to Google and Face­book as adver­tis­ers shift more of their bud­gets to the Internet.

Investors also want Yahoo to sell its 35 per­cent stake in Yahoo Japan so it can reel in even more cash on sharpen its focus on its U.S. busi­ness. But Yahoo has said it isn’t close to agree­ing on an accept­able price with Soft­bank, the con­trol­ling owner of Yahoo Japan.

The Alibaba deal still rep­re­sents one of the few times in recent years when Yahoo has out­shined Google in an area of busi­ness. While Google has been able to dom­i­nate Inter­net search and adver­tis­ing, some of the company’s high-profile invest­ments out­side its spe­cialty have proven to be busts. Google lost most of its money on a $1 bil­lion invest­ment made in AOL Inc. in 2006 and a $500 mil­lion invest­ment in wire­less ser­vice provider Clear­wire Corp. in 2008.

When it trims its Alibaba stake, Yahoo will also be shav­ing its prof­its. Yahoo’s earn­ings from its invest­ments totaled $172 mil­lion dur­ing the first quar­ter, with most of that flow­ing from Alibaba.

Gillis expects Yahoo to off­set the reduced earn­ings from Alibaba by buy­ing back about 277 mil­lion shares under its expanded repur­chase pro­gram. With less stock out­stand­ing, Yahoo’s earn­ings per share should rise by about 9 cents per share next year, even after account­ing for the decreased income from Alibaba.

Posted by AP News on May 21 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.