Yahoo is paying $1bn (£600m) for 40 percent of Chinese Web auctioneer Alibaba.com, taking on eBay and search firm Baidu.com as it extends its reach in the world's second-biggest Internet market.
Alibaba.com and Yahoo announced the deal in Beijing on Thursday. In a letter to employees, Yahoo! director Jerry Yang said that the dealing will be finished before Q4.
Jack Ma, the creator and chief executive of Alibaba, said the aim of the deal is to create a better e-commerce and searching business. After the combination, Alibaba.com will consist of Yahoo China, Alibaba.com, Alipay and Taobao.com, and will offer instant-messaging, e-commerce, search and portal services.
Ma also said that Alibaba is making profits in the B2B space, but didn't disclose further details. Alibaba hopes to outperform eBay and Google in the Chinese market.
The new combined entity will have a four-person board, consisting of Ma, Alibaba.com's chief financial officer, Yang, and Sun Zheng, a representative from Softbank. It is valued at $4bn.
The deal comes as interest in China's Internet players is heating up, as highlighted when shares in Baidu.com more than quadrupled in value on the day of their Nasdaq debut last week.
With the number of Internet users in China expected to exceed 120 million by the end of this year, China is the world's second-biggest online market, and Ma said he expected it to surpass the United States to claim the top spot in five years.
Reuters contributed to this report.