Yahoo, Alibaba negotiating over Alipay rift: Is China's Internet promise worth the effort?

Yahoo and Alibaba said the negotiations over the Alipay spinoff were underway because neither side looks good in this one. Alipay, China's largest online payment network, is worth billions of dollars.
Written by Larry Dignan, Contributor

Yahoo and Alibaba Group said they "are engaged in and committed to productive negotiations" to resolve a dust-up over Alipay, a unit that was moved to another investment vehicle.

In a statement, Yahoo and Alibaba said the negotiations over Alipay were underway because neither side looks good in this one. How can China's largest online payment service be spun off without Yahoo---Alibaba's largest shareholder knowing it? If you buy Yahoo's statement that it didn't know---Alibaba said Yahoo was informed---why weren't the consolidated financial statements restated? In recent days, Yahoo and Alibaba have dueled over transparency and disclosure following a spinoff of Alipay, China's largest online payment service. In a nutshell:

  • Alibaba transferred Alipay outside of the company to reportedly placate Chinese regulators, who didn't want Yahoo holding such a sizeable stake.
  • The People's Bank of China ordered that non-bank payment companies obtain licenses. As a result, Alipay had to be transferred to Chinese nationals at some point.
  • Yahoo said it wasn't informed until March 31 that Alipay equity was transferred to a new vehicle last August.
  • Alibaba said the spinoff was lawful and transparent, reported Bloomberg.
  • Yahoo and Softbank, the two key shareholders in Alibaba, are negotiating with Alibaba.

Apparently, this worry about Yahoo and Softbank---U.S. and Japanese companies, respectively---owning Alibaba has been a lingering problem in China. Yahoo bought a stake in Alibaba in 2005. Under that arrangement, Yahoo contributed its Yahoo China business along with $1 billion to Alibaba. Yahoo became the largest investor in Alibaba with a 40 percent stake.

That deal was fine then and it's even better now---assuming Yahoo can monetize Alibaba gracefully. Jefferies analyst Youssef Squali reckons that Alibaba is worth $10 billion to Yahoo's valuation.

Squali writes that the Yahoo-Alibaba flap...

Raises serious concerns about Yahoo!'s ability to retain this asset or monetize it fairly without potentially a long drawn out process that could include litigation. While our discussions with Yahoo! post release provided some clarity into the situation, it was also clear that there was no reasonable way to handicap timing and chances for a reasonable outcome.

Yahoo's stake in Taobao shouldn't be an issue given that China has different much more liberal regulation for e-commerce companies compared to payment systems.

The much larger issue here is whether large Internet companies should bother with China given the regulatory and censorship issues. It's obvious that Google's efforts in China were a mess. Yahoo is having trouble too.

At issue is trust and whether it’s worth playing ball in China. It's also hard to believe that Softbank and Yahoo didn't know Alipay was being transferred since both companies are on the Alibaba board of directors. It's also sketchy that the Alipay spinoff wasn't disclosed in Alibaba financials.

Stifel Nicolaus analyst Jordan Rohan writes in a research note:

These events undermine the trust that investors will place in Yahoo! CEO Carol Bartz, in our view. If Bartz knew about the transfer of ownership, didn't she have an obligation to disclose it as soon as possible? Most would argue that this transaction was quite material. If Bartz was in the dark about these undertakings, why wasn't more careful oversight in place? But the trust issue goes way beyond CEO Carol Bartz. Investors are already questioning the disclosure and oversight of other Chinese companies. We hope and believe this situation to be isolated, but investors are likely to apply a broader discount to Chinese Internet companies, at least in the near term.

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