Alibaba-Yahoo: Still Some Love?

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 |  Includes: YHOO
by: Doug Young

Alibaba may have lost its affection for Hong Kong's securities regulator after an impasse over its IPO plans, but it appears to be moving in a happier direction these days with U.S. Internet giant Yahoo (NASDAQ:YHOO). That's my assessment, following word that Yahoo will hold onto a larger share of China's e-commerce leader than the 2 sides had previously agreed to last year when they reached a landmark deal to end their 7-year-old stormy marriage. That leads me to my longer-term forecast that perhaps we could see this pair remain united for the next few years in a strategic alliance, which could even see Alibaba acquire its own strategic stake in Yahoo at some point in the not-too-distant future.

The apparent thawing in this relationship has everything to do with Marissa Mayer, who took over as CEO of Yahoo more than a year ago with a mandate to overhaul the struggling former global search leader. I previously saw signs that relations were improving between the pair as early as last December, when Alibaba announced the appointment to its board of a Yahoo executive. (previous post) I did a lot of reading between the lines at that time, but my bottom line was that the appointment could represent an early sign of a thawing in the frosty relations between the 2 companies.

Now this latest news appears to show that relations are indeed getting warmer between the pair. According to the latest reports, Yahoo is now saying it will sell 208 million of the 523.6 million Alibaba shares it now holds when Alibaba makes its highly anticipated IPO, most likely next year. (English article; Chinese article) That figure is about 20 percent less than the 261.5 million Alibaba shares that Yahoo originally said it would sell at the time of the IPO when the 2 sides announced their divorce agreement last year.

The new share sale plan means Yahoo will hold about 13 percent of Alibaba's shares after the IPO. It now holds about 24 percent of Alibaba shares, and once held around 40 percent after it paid $1 billion for its landmark investment in the Chinese company in 2005. Depending on who you believe, Alibaba's market value could now be worth $100 billion or more, meaning that Yahoo's current 24 percent stake of Alibaba is worth up to $24 billion.

Yahoo said it decided to sell less shares than previously announced because it was "confident in the long-term potential and the value of Alibaba." While obviously Alibaba does seem to represent a solid investment, I also have to believe that Yahoo wouldn't have made such a big decision without the approval of Alibaba's opinionated founder Jack Ma. It was Ma who struck the original agreement to sell 40 percent of his company to Yahoo in 2005, and then Ma who quickly become disenchanted with his U.S. partner under the leadership of the caustic Carol Bartz, who was named as Yahoo's CEO in 2009 and was ultimately fired in 2011.

Like Ma, Mayer looks a strongly opinionated character, and has made a large number of acquisitions and other major moves since taking the reins of Yahoo. But unlike Bartz, Mayer seems to be smartly taking a hands-off approach to Alibaba's management, and is content to let Ma and his team run Alibaba's daily affairs. It's probably still too early to say whether this marriage will ultimately endure, but I would say the chances now appear to be at least 50-50. If this pair do indeed re-discover their lost love and try to work together strategically, I could easily see Yahoo retain a stake of around 10-13 percent over the longer term, with Alibaba perhaps ultimately buying an equivalent stake in the U.S. firm.

Bottom line: Yahoo could ultimately retain a 10-13 stake in Alibaba, as relations between the pair improve under Yahoo CEO Marissa Mayer.