Chinese e-commerce giant Alibaba Group has been trying to buy back a big stake in the company from Yahoo! for two years now, in a bid to expand its business and eventually issue an initial public offering. Earlier this week, Yahoo! and Alibaba have approved a US$ 7.1 billion deal that analysts consider to be helpful for both companies moving forward. The pressing question now is whether Alibaba can reach Facebook heights if and when it goes for an IPO.
The hundred billion dollar question is still three to four years in the making, analysts say, as Alibaba would have to deal with intense competition in the US$ 36 billion Chinese e-commerce market. Plagued by counterfeiting and piracy woes in its online auction and retail platform, the stock buy-back is only the first step in maintaining its lead in this industry.
IPO by 2015?
Yahoo! acquired a 40 percent stake in Alibaba in 2005 at US$ 1 billion. Back then, the search company was still doing well in search and advertising, and was holding out against Google. Yahoo!'s relationship with Alibaba went south when the Chinese company spun off its Alipay online payment system without consulting the Yahoo! board and shareholders.
Yahoo! has since started going on a downward spiral, and has reportedly been considering the possibility of being merged or acquired by another company.
In 2008, Microsoft made an unsolicited bid to acquire Yahoo! for US$ 47.5 billion, which the search company declined. Today, Yahoo! is valued at about US$ 18.8 billion. Part of this decline in valuation and difficulty in finding a buyer is reportedly due to the difficulty in monetizing its Asian assets, which include Alibaba and Yahoo! Japan.
Under the deal, Yahoo! will be selling back half of its stake in Alibaba -- or a 20 percent share -- which the latter will finance through a mix of cash and newly-issued preferred stock, valued at a total of US$ 7.1 billion. The rest will come as an incentive for Alibaba to go public.
Part of the conditions of the stock sale will be that Alibaba repurchase half of the remaining shares -- or 10 percent -- at IPO price one they go public, or allow Yahoo! to sell these shares at the IPO.
Alibaba is currently valued at US$ 35 billion, with some estimates placing the valuation at US$ 63 billion. Whether the Alibaba Group would be able to match Facebook's May 18 IPO valuation of US$ 105 billion will highly depend on whether the Chinese company can clean up its online commerce system of counterfeit goods, among others.
Big Comeback for Yahoo!
Meanwhile, the stock buy-back is considered a big boost for Yahoo!'s new interim CEO Ross Levinsohn, as the company can now focus on a comeback plan. The deal also frees up Yahoo! from previous limitations against making investments in China outside of Alibaba.
At this point, it is very likely that Yahoo! will continue being involved with Alibaba and with China, says Nomura Securities analyst Jin Yoon.
In the end, the buy-back is considered a win-win situation for both companies, and both have taken the deal as having cleared a big hurdle for challenges that lie ahead.