Alibaba IPO Boosts Yahoo!

| About: Yahoo! Inc. (YHOO)

Yahoo! Inc. has taken it on the browser lately from assorted pundits for everything from falling behind Google Inc., to not getting a stake in Facebook Inc., to colluding with Chinese authorities in the arrest of a journalist.

But Yahoo! got a break from the drumbeat of bad news on Tuesday, Nov. 6, with the stellar stock market debut of Ltd. Shares in the Hangzhou, China, e-commerce company, which went public on Tuesday on the Hong Kong stock exchange, soared nearly 200% from its HK$13.50 ($1.74) offer price, closing at HK$39.50, which translates to a market capitalization of $25.4 billion. The IPO, which raised $1.5 billion, is the biggest since Google's 2004 offering, which raised $1.7 billion.

In 2005, Yahoo! traded its Chinese operations and an investment of $1 billion in exchange for a 39% stake in Alibaba Group,'s parent company. Yahoo! also got a 1.2% stake in the Internet property, a stake now valued at a cool $7.8 billion, or roughly 20% of Yahoo's current $40.1 billion market capitalization.

Despite Alibaba's blockbuster debut, Yahoo! shares closed down 4.6% Tuesday at $29.93 a share. Part of the weakness is attributable to investors in recent weeks having already "priced in" a successful offering into the value of Yahoo!'s stock. Shares in the Sunnyvale, Calif., company actually hit a 52-week high of $34.08 last week. But there is also concern that Alibaba is overvalued after its first day of trading and that its stock may dip.

Investors were also keeping an eye on Washington to gauge the impact of Yahoo! CEO Jerry Yang's appearance Tuesday before a congressional committee over the company's role in the jailing of a Chinese journalist. Yahoo! turned over information about the journalist's online activities to the Chinese government.

Such concerns aside, Yahoo!'s investment in Alibaba is paying off. Although Yahoo! relinquished use of its brand in China to Alibaba, the search giant is allied with one of the country's leading Internet companies.

"If you think back to 2005, it was an extremely bold move to invest $1 billion and give your branded franchise to a company that was private and only had revenues of $100 million," said Matt Comyns, a managing partner with research firm JL McGregor & Co., which focuses on China. "Yahoo! was honest with themselves and figured they could create more value by partnering with one of the leaders of the Chinese Internet."

And while Yahoo! is precluded from using its brand in China, the company could buy other Chinese companies and run them as independent operations. Possible targets for Yahoo! are online video provider and social networking sites (which literally translates as "Facebook") and

"The Chinese Internet market is not as mature as the U.S., so for another $1 billion bet, who's to say Yahoo! can't own the YouTube of China," Comyns said. "They can play this game in China -- maybe not as well as Google and Microsoft [Corp.] , because they have deeper pockets, but Yahoo! in some ways is better off making these bets in China because their dollar goes further."

Yahoo! is well-positioned elsewhere in Asia. It is an established player in Japan, where the success of its online auction site led eBay Inc. of San Jose, Calif., to withdraw from the country in 2002. In a research note on Tuesday, Bear, Stearns & Co. analyst Robert Peck raised his price target on Yahoo! to $34 a share from $30, noting the company's investments in both China and Japan. At $34 a share, Yahoo! has a market capitalization of $45.6 billion versus $40 billion at $30 a share.

In the third quarter of 2007, Yahoo! recorded $573 million in revenues from its international operations, compared with $1.2 billion in sales from its U.S. business.

Although Yahoo!'s operations in the Far East are a valuable asset for a company that has lost ground in the U.S., operating as minority partner also carries risks. Yahoo! owns 35% of Yahoo! Japan, with telecommunications and media company SofBank Corp. of Tokyo owning more than a 50% stake.

"As long as the local partner executes well, it's fine," said David Garrity, an analyst with Dinosaur Securities LLC in New York. "In the event that the local majority party doesn't execute, then it's questionable in terms of its value to shareholders."