The Curious Case of Alibaba Versus Yahoo

It’s tempting to frame last week’s tiff between China’s Alibaba and America’s Yahoo as an open-and-shut case of corporate governance – or rather mis-governance on Alibaba’s part. There is certainly no lack of observers who see it this way.

 
“Yahoo is a victim, plain and simple,” Jacob Frenkel, a partner at US law firm Shulman Rogers, told the website iChinaStock.com. “Alibaba and its CEO personally could be and likely will be sued for breaching their duties to Yahoo and its shareholders, and probably violating clear and specific provisions of contracts.”
 
The issue, as those who are following this case know, is Alibaba’s transfer of ownership in August 2010 of online payments subsidiary Alipay to a private company partly owned by Alibaba co-founder Jack Ma.
 
Yahoo said on May 12 that it was informed of the move, which it describes as having “occurred without the knowledge or approval of the Alibaba Group of directors or shareholders,” only on March 31 this year. Alibaba strongly disputes that version of events.
 
It asserts that the Alibaba board, which includes Yahoo co-founder Jerry Yang, was told in July 2009 that the majority of Alipay’s shareholding would be transferred to a Chinese owner because the central bank may not grant a crucial license to an online payment entity that is controlled by foreigners.
 
As the issue threatened to degenerate into a corporate ‘he said, she said’ spat, with partisans of Team Yahoo and Team Alibaba making the case for their respective sides, the two companies issued a joint statement on May 15.
 
“Alibaba Group, and its major stockholders Yahoo! Inc. and Softbank Corporation, are engaged in and committed to productive negotiations to resolve the outstanding issues related to Alipay in a manner that serves the interest of all shareholders as soon as possible,” said the one-sentence statement.
 
Tempers have now appeared to cool, but the uncertainty has yet to dissipate. The share price of Nasdaq-listed Yahoo continued to slide on May 16, when it closed at US$15.81 – down 14.8% from May 10, when the fracas started.
 
Beyond Alibaba
There are wider issues here. CFOs of foreign companies doing business in China and their local partners may now start to wonder what the other side is up to. The mistrust may have been building up for some time. Alibaba is not the first – or likely the last – Chinese enterprise to go head to head with foreign partners in recent years.
 
In 2007, for example, French dairy giant Danone figured in a high-profile spat with China’s Wahaha Group over what Danone said was Wahaha’s refusal to discontinue its own dairy businesses outside of the two companies’ joint venture. The dispute was settled two years later, with Danone selling its 51% stake to Wahaha for an undisclosed sum.
 
Rifts like these may also affect Chinese capital-raising in the US. According to capital markets analytics firm Ipreo, 36 mainland Chinese companies have listed in US markets since September last year. These initial public offerings experienced an average first-day rise in price of 21%.
 
“However, 30 days after their debuts, these deals traded an average of only 4% above their offer prices,” Ipreo notes. “In comparison, US-based companies brought 147 initial offerings to market in the same period with an average 1-day rise of 8% and an average 30-day return of 22%.”
 
Ipreos speculates that the downward trend “may be reflective of wary US investor sentiment towards deals that have lately offered surging initial performance only to slump after the spotlight moves on to the next hot deal.” It’s a wariness that may now be compounded by perceptions of corporate mis-governance as companies like Alibaba come under increased scrutiny.
 
Out on their own
The expectation is that more Alibaba/Yahoo-type disputes will surface as emerging markets like China become major players in the global economy while developed markets such as the US see their influence wane as they grapple with heavy economic problems.
 
In this environment, emerging market companies that come to believe, rightly or wrongly, that they had entered into unfair partnership agreements may become more confident and assertive in seeking to renegotiate terms – or may decide to leave the partnership altogether and venture forth on their own steam.
 
This appears to be the dynamic that’s at work in Alibaba, which is owned 43% by Yahoo and 33% by Japan’s Softbank. The remaining 24% is controlled by Ma and his associates, who co-founded the company in 1999.
 
Softbank is an original backer of Alibaba, having joined Goldman Sachs, Fidelity and other venture capitalists in funding the start-up. Yahoo is a later comer, having come in only in 2005, when it injected US$1 billion and its Chinese assets into Alibaba.
 
When Yahoo made its investment, Alibaba was already one of the mainland’s largest Internet-based businesses, with a dominant presence in business-to-business trade and online retail and payment platforms. Two years later, in 2007, Alibaba.com, an e-commerce site focusing on small businesses in China, raised an impressive US$1.7 billion in an initial public offering in Hong Kong.
 
In a Form 10-Q filing with the US Securities and Exchange Commission on May 10, Yahoo valued its stake in Alibaba at US$2.3 billion, as of March 31, 2011 – more than double its original investment and in effect valuing the entire privately held Alibaba at US$5.3 billion. Some analysts value Yahoo’s stake as high as US$10 billion.
 
But even as Alibaba’s market value soared, its relations with Yahoo also began to unravel. Last year, Ma branded his erstwhile partner as “reckless” for expressing support for Google when it threatened to leave the mainland because of cyber attacks against it that supposedly emanated from China.
 
The two partners also had disagreements over Alibaba’s decision to switch its online classified business from Yahoo China to another subsidiary, Taobao, and Yahoo’s abandonment of its search technology in favour of partnering with Microsoft’s Bing.
 
Alibaba is said to have concluded that Yahoo no longer has much to bring to the table in terms of technology and other synergies. It negotiated to buy back some or all of Yahoo’s stake last year, but no agreement was reached. Those negotiations may be restarted in the light of the latest brouhaha, although officially, the commitment of the two sides to engage in “productive negotiations” relates only to Alipay.
 
What next?
Yahoo may decide to follow Danone’s lead and also sell its stake. But while Danone is continuing to fight it out with Wahaha and other food rivals for the affections of 1.3 billion consumers, it is unclear whether Yahoo can do the same. Yahoo China has not been especially successful even under Alibaba’s stewardship – the mainland’s search engine market is now dominated by Baidu and Google China.
 
One thing is clear, though. Outsiders may huff and puff about its supposed corporate mis-governance, but Alibaba has come to a point where it is confident about its prospects and ability to run its businesses on its own terms. It no longer feels it needs foreign capital, technology and expertise, or at least not from a company like Yahoo, as much as it may have in the past.
 
What this also means is that multinationals and other foreign companies in China and elsewhere in Asia are increasingly facing new challenges in partnering with, and competing against, local businesses. The next few years is going to be an interesting time for everyone.     
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.
 
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