China’s largest e-commerce player Alibaba Group has struck a deal with Yahoo, who own a 40 per cent stake in the company. Alibaba will buy back half of the shares, which Yahoo bought in 2005 for $1 billion, for a sum of $6.3 billion and $800 million in newly issued Alibaba preferred stock. (All figures are US dollars). Obviously Yahoo made a pretty good deal as the $1 billion they invested in 2005 now appears to be worth nearly $13 billion, if they were to sell all their stock instead of half of it.
The deal was announced this morning before the US markets opened and Yahoo shares peaked today with gains of 3.8 per cent on opening, however the stock ended up only 1 per cent higher at the end of trading. Its good news for Yahoo but the markets aren’t very robust right now so a lot of investors probably took profits following the buy on rumour, sell on news adage even with the promised dividends. However it's not a bad result on a day that Facebook’s newly issued on Friday shares dropped 11 per cent in value.
The deal is good for both companies, Yahoo gets an excellent return on their investment, taken under the stewardship of Jerry Yang, and Alibaba get more control on their own destiny. CEOs of both companies explained the positives in statements today. Jack Ma of Alibaba said “This transaction opens a new chapter in our relationship with Yahoo; it will establish a balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future.” Happy about the other side of the bargain Ross Levinsohn, the new interim CEO of Yahoo, said he was happy about the deal being struck and looked forward to working with Alibaba on new initiatives. Yahoo will be using the income to reward shareholders. Yahoo CFO Timothy Morse said “We look forward to delivering the proceeds of the near-term transaction to our shareholders.”
Yahoo has been fighting decline recently, people say internet portals are old fashioned and Yahoo revenues are shrinking while competitor’s earnings swell. One of Alibaba’s subsidiary companies called Taobao.com is a public buying and selling site with over 370 million users. In addition to the share deal Alibaba will also continue to operate Yahoo China for the next four years following a royalty payment of $550 million. These deals and income should be enough to placate investors for a period while the new management work on their comeback strategy.
