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September 19, 2014

Yahoo and Alibaba: Bitter Rivals or Business Partners?

By Jim Bach for Money Morning
Yahoo Inc. (Nasdaq: YHOO) is often mentioned in the same breath as Alibaba Group Holding Ltd. (NYSE:BABA).That's because of Yahoo's stake in Alibaba - it owns about 24% - initiated in 2005.
And this means a lot for YHOO as Chinese e-commerce giant Alibaba preps for the largest IPO in history.
Here's how the Yahoo-Alibaba partnership began, and what it could mean for both Yahoo and Alibaba stock going forward...

Bitter Rivals Turn Business Partners
In 2004, Alibaba and Yahoo were rivals.
That April, Alibaba accused Yahoo! China of violating Chinese law on unfair trade practicesby extracting personal data from 50,000 of its clients on its online auction platform, Taobao.com.
That proved to be a brief setback, however, as the two companies shared an interest in knocking eBay Inc. (Nasdaq: EBAY) off its pedestal. Through its takeover of EachNet.com, EBAY controlled 90% of the online auction marketplace in China.
So in August 2005, YHOO announced that it would buy a 40% stake in Alibaba for $1 billion in an attempt to eat away at EBAY's dominance, a deal which closed in October.
YHOO handed over the once-in-question Yahoo! China to Alibaba, allowing it to exit the regulatory minefield that was the Chinese Internet industry, while also providing it with exposure to rapid e-commerce growth in China.
Alibaba, on the other hand, was able to fold its search engine entities, 3721.com and yisou.com, together under the Yahoo! China banner, and more effectively challenge search engine rival Baidu.com in its quest for online dominance.
But in only a few years after this partnership began, the troubles started...
In spring 2008, the seemingly online hegemony of Google Inc. prompted Microsoft Corp. to seek out YHOO for a merger, to give both companies a fighting chance at competing with the online search behemoth.
The deal would have effectively ended the Yahoo-Alibaba partnership, because of a shareholder agreement that allowed Alibaba to buy back its shares if YHOO were acquired.
But as Alibaba readied for a buyback the deal ultimately fell through, with the two companies quarreling over the terms of the deal. Some analysts were critical of YHOO's refusal to be purchased by MSFT.
"We think Yahoo has done its shareholders a great disservice by not consummating a deal with Microsoft," Morningstar analyst Larry Witt wrote in a 2008 analyst note. "A sale to Microsoft was the best possible outcome for Yahoo shareholders."
The recession hit YHOO especially hard. It did a poor job of investing capital, according to Morningstar, and it was struggling to grow revenues in a slow economy, as well as in a marketplace where it was continually losing ground to competitors.
Suspicion arose in 2008 that because of its woes, YHOO would begin a sell-off of its assets. It looked like Alibaba, which was then valued at $9.4 billion, could provide a quick cash boost to YHOO's diminishing coffers.
YHOO, however, continued to tout the importance of its exposure to the Chinese company and held on tightly to its 40% stake. It did, however, sell a 1.14% stake, or 57.5 million shares, of Alibaba.com, the parent company's flagship website.
The partnership remained intact, until it was severely threatened by rising tensions between the two firms in 2010...
Courtesy Jim Bach for Money Morning (EconMatters author archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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