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April 2014


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Alibaba Buys Back Half Of Yahoo’s 40 Percent Stake For $7.1bn « Back
Selina Harrison, July 2012
In May, it was announced that beleaguered internet giant Yahoo had agreed to sell half of its 40 percent stake in Chinese e-commerce group Alibaba back to the company for approximately $7.1bn. Not only does the deal attempt to rebuild a fragile relationship between the two business partners, it provides a financial lifeline for Yahoo, which, while rapidly losing market share and advertising revenue to the likes of Google and Facebook, has been looking at a number of options to breathe a new lease of life into the company.

Perhaps best known for its web portal, search engine and social media websites, Yahoo was founded by Jerry Yang and David Filo in 1994 and quickly became one of the largest websites in the US. In its heyday, Yahoo was worth $80bn. But failure to innovate at the pace of rivals caused the firm to rapidly decline in value to a current market cap of around $18bn.

With the business in continued decline, Yahoo has long been viewed as a potential takeover target.

In 2008 Microsoft bid $45bn for the company. When Mr Yang rejected the offer, former chief executive Carol Bartz replaced him. However, boosting Yahoo’s growth and share price proved difficult. The signing of a 10-year deal with Microsoft – in which Microsoft’s Bing powered the search feature on Yahoo sites in exchange for ad revenue – didn’t pay off. In the 12 months ended June 2011, Yahoo generated $1.54bn in net revenue from search ads, down from $1.8bn in the previous 12-month period. Frequently criticised for her abrasive management style, the board also become frustrated with Ms Bartz’s ability to retain Yahoo’s sales division. Ms Bartz was controversially fired in September 2011. At the time, Roy Bostock, then chairman of Yahoo’s board, said a “comprehensive strategic review” of the company was being carried out. Meanwhile, chief financial officer Tim Morse was named as interim CEO of the company.

In the following months Yahoo received numerous takeover bids from the private equity industry and other tech groups. Indeed, on 30 November 2011, keen to acquire a minority shareholding to protect its 10-year agreement with Yahoo, Microsoft teamed up with private equity firms Silver Lake and TPG Capital to bid $16.50 a share for Yahoo, valuing the firm at $20.6bn.

The following day it was announced that the Alibaba Group, which operates businesses including Taobao, China’s biggest online shopping site, and the commerce site for businesses, was teaming up with private equity firms Blackstone Group and Bain Capital to prepare a bid for all of Yahoo in a deal that could value the web portal at about $25bn. That bid failed to come to fruition. However, Alibaba was clearly interested in buying back the 40 percent stake that Yahoo owned; in recent years, founder Jack Ma had tried numerous times to buy back the stake, only to be rebuffed by Yahoo.

In 2005, the Alibaba Group sold the stake to Yahoo for $1bn and ownership of Yahoo’s Chinese unit. Alibaba is part-owned by Japan’s Softbank Corp. and Singapore’s Temasek Holdings Pte. However, relations between the companies soured last May when it was revealed that Alibaba had abruptly handed Alipay – China’s most-used online-payment operator – to a company controlled by Ma, apparently without Yahoo’s knowledge. The following July, Alibaba said it reached an agreement with Yahoo and Softbank Corp. over compensation accruing to the spin-off of Alipay. However, many believed that Ma’s role in the dispute would make it difficult for Alibaba to conduct business with Yahoo in the future.

Even so, Yahoo continued to review its strategic options and by December it was announced that the company was again in talks with Alibaba, and was mulling the sale of the bulk of the company’s valuable holdings in its Chinese partner.

At the time, Yahoo’s stake in Alibaba was reported to be worth about $12bn and its 35 percent stake in Yahoo Japan at about $5bn. However, as an outright sale would have significant tax implications, the two parties discussed a tax-free cash-rich split – which, under Internal Revenue Service guidelines, would not be considered a sale but rather a kind of asset swap — allowing Yahoo and Alibaba to avoid taxes. Under the terms of the deal, Alibaba and Softbank, Yahoo Japan’s majority owner, would create new subsidiaries that would consist of both cash and operating assets that Yahoo would like to run. Yahoo would then swap out most of its stake in Alibaba and its entire stake in Yahoo Japan for these subsidiaries, effectively selling those holdings.

With talks ongoing, in the middle of February it was reported that Alibaba had received fully underwritten commitments from six banks for a $3bn loan it would use to pay towards the deal. However, noting the unreasonable terms sought by Yahoo and a disconnect between Yahoo’s negotiating team and its strategic stakeholders, days later it was widely reported that talks between Alibaba and Yahoo had broken down. After a week of negotiations in Hong Kong, Yahoo representatives, including chief financial officer Tim Morse, had returned to the US.

However, besides being unable to come to an agreement with Alibaba, internally the members of Yahoo’s executive suite were also failing to get along. Scott Thompson, the former president of eBay Inc.’s PayPal unit, was employed in January 2012 to head Yahoo and steer the strategic direction of the company – but things were not going to plan.

Frustrated that Yahoo’s new executive had not established a new direction for Yahoo, activist investor Daniel Loeb, whose hedge fund Third Point LLC owns 5.8 percent of Yahoo, sought more control. Against the wishes of management, Mr Loeb began a proxy fight, pushing for the appointment of his own slate of directors on Yahoo’s 10-person board. While Yahoo was in negotiation will Alibaba, Mr Loeb filed documents with the Securities and Exchange Commission to nominate former NBC Universal CEO Jeff Zucker, along with himself and two others.

Relations between Mr Thompson and Mr Loeb become further strained in April, when, in an attempt to cut costs and rekindle growth, Mr Thompson announced the company would lay off 2000 employees, about 14 percent of its workforce.
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