May 16 (Bloomberg) -- Yahoo! Inc.’s toehold in China is under threat by a widening rift with Alibaba Group Holding Ltd., the e-commerce provider it partly owns and that analysts say may account for three-fourths of its market value.
Yahoo tumbled 11 percent last week, the largest one-week decline in almost two years, after it said the Chinese company spun off its online payment business in August without informing shareholders, fueling concern the stake would lose value. The drop extended amid disputes with the Chinese company over whether Alibaba Group was compensated for the loss of one of its most valuable businesses.
The disagreements reflect a worsening of relations between companies that have clashed over Chinese censorship rules and Yahoo’s unwillingness to sell its stake. It also cast doubt on Yahoo’s ability to benefit from its part ownership of Alibaba Group, which includes e-commerce sites Alibaba.com and Taobao.
Other investors, including David Einhorn’s Greenlight Capital Inc., have bought Yahoo because of its stake in Alibaba. The holding helps it benefit from demand in China, the world’s No. 1 Internet market, with 457 million users.
The holding had been one of the few alluring assets for a company struggling to take share from Google Inc. in the U.S. online-ad market, projected by EMarketer Inc. to swell to $28.5 billion this year. Yahoo is also vying for Web users and advertisers against social media upstarts led by Facebook Inc.
Yahoo Tumbles
Yahoo, based in Sunnyvale, California, fell 62 cents, or 3.6 percent, to $16.55 in Nasdaq Stock Market trading on May 13. It has lost 11 percent since May 10, when Yahoo said Alibaba Group spun off its Alipay unit to a company mostly owned by Jack Ma, chief executive officer of Alibaba Group.
Ma said May 14 that the transfer is "lawful" and "transparent" after Yahoo said last week it wasn’t consulted on the change of ownership. Alibaba Group and Yahoo said in a joint statement yesterday that they and Softbank Corp., Alibaba Group’s second-largest shareholder, are "engaged in and committed to productive negotiations to resolve outstanding issues related to Alipay."
Alipay’s transfer adds to challenges facing Yahoo CEO Carol Bartz, who is attempting to revive growth and restore investors’ confidence three years after her predecessor, Jerry Yang, rebuffed a takeover bid by Microsoft Corp.
Disputes Over Spinoff
“The value of the stake in Alibaba today is perceived to be worth more than the value of Yahoo in the U.S. and everywhere else that it consolidates operations,” said Jordan Rohan, an analyst at Stifel Nicolaus & Co. in New York. “There’s a real management credibility issue on at least one side of the table, possibly both."
Yahoo said last week it learned of the spinoff in March and that it began negotiations over Alipay with Alibaba Group and Softbank. The payments business has a value of $5 billion, Brett Harriss, an analyst at Gabelli & Co., wrote in a report last week.
Alibaba Group was compensated for the spinoff, a Hong Kong- based Alibaba spokesman, John Spelich, said by phone May 13. He declined to disclose the amount.
Yahoo disagrees with Alibaba Group’s assertion about compensation, said a person who is familiar with the matter and asked not to be identified because the talks are private.
Who Knew What, When
Alibaba Group was paid about 300 million yuan ($46 million) for Alipay by a company controlled by Ma, Caing.com reported last week, citing public company registry data. Alibaba’s Spelich declined to comment on the report.
Another point of contention: when Alibaba Group informed its board and shareholders about the spinoff. Yahoo says Alibaba Group didn’t disclose the transaction until March 31, more than half a year after the August transfer of ownership.
Alibaba Group said its board, which includes Yahoo co- founder Yang and Softbank President Masayoshi Son, was informed of the plans in July 2009 -- well before the spinoff. Yahoo learned of a temporary and provisional restructuring of Alipay at that time, though Alibaba Group maintained operational and financial control over Alipay, the person said.
"It does look dubious for Alibaba to backdoor this without at least floating the idea first," Michael Clendenin, managing director at research company RedTech Advisors in Shanghai. "Yahoo should not be happy about this. From a corporate governance point of view, Alibaba should know better. It’s very messy the way Alibaba went about this."
Alibaba’s Lost ‘Confidence’
Relations worsened last year as the companies failed to reach an agreement to let Alibaba Group buy back shares. Yahoo acquired the stake in 2005 in exchange for $1 billion and ownership of Yahoo’s Chinese unit. Alibaba Group CFO Joseph Tsai held at least two meetings with his counterpart at Yahoo, Tim Morse.
Ma said on May 14 that the breakdown in talks caused a "loss of confidence" in Yahoo. Tsai said the same day that he expects to have the opportunity to buy back shares again.
Fissures became public by January 2010 when Alibaba Group described as "reckless" Yahoo’s support for Google, which tangled with Chinese authorities over the nation’s Web- censorship rules.
Before the latest cooling of relations, Yahoo had received a vote of confidence from Greenlight Capital, which said last month it added shares in the company. Einhorn gained renown from his bet against Lehman Brothers Holdings Inc. in 2008, before its bankruptcy.
Loss of Control
Alibaba Group may account for as much as 75 percent of Yahoo’s valuation, according to Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco who rates the stock a "buy" and doesn’t own it. Yahoo’s stake in Alibaba Group ultimately may be worth as much as the company’s entire market value, Greenlight wrote in an April letter.
Investors now may think twice about using Yahoo as a gateway to China, said Colin Gillis, an analyst at BGC Partners LP in New York.
‘‘The risk may have been higher than they thought -- that’s your lesson,” Gillis said. “You’re dealing with a cross-border situation, and the company may not have as much control at determining its own fate as we previously thought.”
--With assistance from Danielle Kucera in New York. Editors: Tom Giles, Nick Turner
To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Mark Lee in Hong Kong at wlee37@bloomberg.net
To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net
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