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Yahoo to Buy Stake in Chinese Merchant A $1 Billion Agreement With Alibaba.Com Creates a Fierce Rival for eBay and Google

Posted on: Friday, 12 August 2005, 12:00 CDT

Stepping up its presence in China, Yahoo said Thursday that it would pay $1 billion in cash and hand over its China operations to Alibaba.com in exchange for a 40 percent stake in Alibaba, China's largest e-commerce company.

The deal is expected to create the largest Internet company in China. It will also create a fierce new rival in China for Google and eBay, which are also expanding their operations here.

Yahoo's deal with Alibaba.com marked the largest foreign investment ever made in a Chinese technology company. The investment comes at a time when some of the world's biggest technology companies are racing to get a foothold in China's fast-growing Internet and online auction businesses.

After the deal is completed, Yahoo said that it would become the largest strategic investor in Alibaba.com, a privately-held company founded in 1999 by Jack Ma, an English teacher turned technology entrepreneur.

Yahoo officials did not say whether they would later seek to acquire majority control of Alibaba.com. But their move clearly puts Alibaba at the forefront of Yahoo's China expansion.

Ma, 40, a flamboyant and aggressive chief executive, will in effect become the head of Yahoo's China operations. Under Ma, Alibaba has challenged eBay here by creating a popular online auction company called Taobao.com.

Ma once told Forbes magazine, "EBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose but if we fight in the river, we win." Alibaba.com, which is based in the city of Hangzhou, two hours south of Shanghai, will manage and operate the new company, running the business-to- business activities of the company's Web site, Alibaba.com, Taobao.com and Yahoo's China operations.

The deal values Alibaba.com, which had about $50 million in revenue last year, at about $2.5 billion, making it one of China's most valuable technology companies along with the search engine Baidu.com and the online gaming company Shanda Interactive Entertainment.

Officials at Yahoo, based in Sunnyvale, California, said the strategic investment was modeled on its earlier investment in Yahoo Japan, which is also run by local management.

Yahoo executives say the new alliance is part of their plan to strengthen the company's position in China by offering business-to- business and consumer online auctions, online advertising, search engines, electronic email and even online payment services.

"We're thinking long term about the fastest-growing country in the world for the Internet," Terry Semel, Yahoo's chairman and chief executive, said by telephone.

Softbank of Japan, a large stakeholder in Yahoo and Alibaba.com, was a prime mover in the deal between the two, according to people who were briefed on the negotiations.

Shares of Yahoo have climbed about 2 percent since Monday, when the first reports about a potential deal with Alibaba.com appeared in the media.

As part of the deal, Yahoo is expected to pay $1 billion in cash to acquire a 40 percent stake in Alibaba, whose Web sites traded about $4 billion worth of goods last year, according to the company. Some of that money will be used to capitalize the new Alibaba company.

Yahoo will also get two seats on the four-member board of Alibaba and retain a 35 percent voting stake in the new company. Jerry Yang, one of the co-founders of Yahoo, will have a seat on Alibaba's board.

Analysts say the deal could significantly lift Yahoo's fortunes in China. The Silicon Valley Internet giant was widely believed to be trailing its biggest competitors in the world's fastest-growing major economy.

"This is good for Yahoo; it can definitely jump-start their operation in China," said Dick Wei, an Internet analyst at J.P. Morgan. "They get Chinese management expertise from Alibaba. They have a proven track record here." Yahoo, Google, Microsoft and eBay are all seeking a bigger slice of the Chinese market. They have all made sizable investments here in recent years. And Silicon Valley venture capital firms are also rushing in, planning to invest billions of dollars in Chinese technology companies.

EBay paid $180 million to purchase a Chinese auction company called Eachnet in 2003. Last year, Amazon.com paid $75 million for Joyo.com, China's largest online book seller. Google has also invested millions of dollars in Baidu.com, China's largest search engine. Baidu's shares soared last Friday in one of the most spectacular debuts on the Nasdaq since the dot-com boom ended over 2000 and 2001.

And Microsoft's portal recently formed a joint venture with a Shanghai company controlled by the son of the former Chinese president Jiang Zemin.

Yahoo has made its own big deals in recent years. The company created a joint venture auction site with Sina.com, another popular Chinese Web site. And in late 2003, Yahoo acquired 3721, a key-word search company, for $120 million

For Yahoo, the deal with Alibaba.com creates a financially stronger and fiercer way of competing with eBbay, which has its own grand ambitions for China. EBay said it would invest about $100 million in China this year and has said it expects the country to become one of its biggest auction markets in the coming decade.

Investors are looking to China because the country already has about 100 million Internet users, second only to the United States. And by 2010, some forecasts project that China will surpass the United States. China's power in technology seems to be growing. It is now home to one of the world's largest personal computer makers, Lenovo, which earlier this year acquired IBM's personal computer business, as well as companies like Huawei, a fast-growing technology equipment maker.

And Chinese consumers are increasingly surfing the Web, blogging, downloading music and video and getting hooked on online games. "Asians are more trendy, and they stay indoors, so that makes them even more interested in computers and high-tech," said Wei at J.P. Morgan. "This is a population interested in changing cellphones every six months."

Source: International Herald Tribune

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