Alibaba, Yahoo's stronghold in China, is reportedly wary of the Microsoft's $44.6 billion bid for the Internet portal. Alibaba is so wary of Microsoft that it is looking for more management independence from Yahoo.
According to the Wall Street Journal, Alibaba management is worried that a Microsoft purchase of Yahoo would hurt its links to the Chinese government. Alibaba, a B2B trading site, is a national champion in China and Chinese regulators are already sniffing around about how a Microsoft purchase would affect the company.
This is bad news for Yahoo. Really bad. Why? If Yahoo wants Microsoft to raise its bid, say to $34 a share or even $40 a share, the company has to argue that its core business and holdings in Alibaba are worth more. That case gets a lot harder if Alibaba further distances itself from Yahoo and ensures its independence. Alibaba is prime real estate that Yahoo could even have to divest if Microsoft acquired the company. Yahoo owns about 39 percent of Alibaba.
Good luck getting to $40 a share from Microsoft with those moving parts.
Yahoo CEO Jerry Yang made it clear in his recent shareholder letter that the company views its holdings abroad as one of the reasons it is worth more. In the letter, Yang said:
We have the added value of our substantial, unconsolidated investments in Japan and China. We have substantial positions in Yahoo! Japan, the leader in its market, and Alibaba, which is strongly positioned in China, a market with enormous growth potential.
If Alibaba arranges more independence from Yahoo in the event of a Microsoft merger a nice chunk of that added value goes kaput. And along with it goes the argument that Yahoo is worth more than $31 a share.