The Yahoo-Alibaba Deal

Announced today. Yahoo will contribute all its China assets plus several hundred million dollars. Yahoo is actually spending $1B, but an undisclosed amount goes to buy shares from existing shareholders. In exchange, Yahoo gets a 40% economic interest and 35% voting interest in Alibaba. I wonder if that voting interest was perhaps capped by the government?

The press release states that the overall deal is valued at over $4B USD. That seems pricey, but that is a guess without knowing the combined company's financials. However, this values the new Alibaba at almost twice Shanda and three times Sina, both of which will do over $120m in revenue this year. Alibaba did $46m in revenue in 2004, I believe Yahoo China did not do much more, and so I would guesstimate that the new Alibaba is somewhere in the $150m revenue range in 2005. Either the market is significantly undervaluing the publicly traded China net giants, by a lot, or Yahoo has paid a premium for strategic reasons.

No question this creates a monster in the China Internet. It will have a powerful combination of search, communications, commerce and auctions. All they need is a game component and they could have a shot at becoming number one. This also may be the only real choice Yahoo had, even though they end up with a minority share in China, as they did in Japan, something they have said publicly and privately they regret. (There is a rumor that the Alibaba deal includes a call option for Yahoo to buy the remaining share of Alibaba in a couple of years, but there was no mention of that in the press release.) They could have tried to build off the 3721 base, but that would have been slow and probably ultimately not successful. I think they tried and failed to buy Sina and possibly Shanda, as they were blocked by the government. Alibaba was not a media company, and so the deal may have been more palatable to regulators.

Yahoo is now the most entrenched US media company in China. Forget Viacom, Disney, Time Warner and News Corp and their small deals for programming sales and the like. Yahoo, which in the end is a direct competitor of those guys, has done a much more comprehensive job of getting into China. What remains to be seen is whether the price they just paid was worth it, or whether they are just another Western company that got stuck with a China premium by a very savvy local operator. The Yahoo guys are very sharp too, so it must have been an interesting negotiation.

This deal is potentially disastrous for Ebay in China. Taobao was eating its lunch on a small budget; now they have the backing of Yahoo to ramp up their efforts several notches. Some people thought if things got really bad for Ebay they could always buy up Alibaba (Ebay is rumored to have offered Alibaba $1B a few months ago). Now that option is gone and there is not another auction player they can buy that would be meaningful. The Alibaba transaction may be the deal that leads Yahoo to 'Japan-ning" Ebay again, this time in China.

Zhou Hongyi, formerly head of 3721 and Yahoo China, must be spinning in his penthouse. Jack Ma is now a far bigger player in the Internet than he ever was. Clearly Yahoo needed to get rid of Zhou Hongyi (Yahoo pushed him out and paid him off early) to be able to do something more strategic in China.

Looks like a smart though pricey move by Yahoo.

Full disclosure, I own shares in Yahoo and puts in Shanda.

Comments

[CC]

I think Alibaba's revenue in 2004 was USD $68.3M. Please correct me if I'm wrong.

[Jeroen (Belgium)]

Great post! Very interesting analysis. What's your take on Sina? How will this deal affect the Yahoo/Sina joint venture

And do you believe Sina can really turn it around in the next quarter? They seemed to hint at that in their earnings release.