Yahoo early this year turned down a $3.5 billion offer led by Jack Ma for a 15% stake in Alibaba Group, according to two sources familiar with the matter, one of whom said Yahoo solicited the offer in the first place. Investors today get their annual shot at interrogating Yahoo, and to their long list of questions, I add this one: Can Alibaba and Yahoo ever strike a deal that puts a fair price tag on what may be Yahoo's most valuable asset, its 40% stake in the Chinese e-commerce giant?
I received a copy of the Ma offer, which was made late last year through a vehicle called Neptune Investment Holdings, from one source on the condition of anonymity, and the outlines of the offer were confirmed by a second source. The rejected deal, which appears to have valued Alibaba Group at about $23.5 billion, was the second failed effort at negotiations in less than a year. That might help explain why Ma told me earlier this year that he didn't trust Yahoo management to ever do a deal.
It is easy to see there is little trust in this relationship. The first meeting in 2009 between Ma and Yahoo CEO Carol Bartz went terribly, as I recounted here. The two companies recently traded blows in public over the transfer of Alipay, China's PayPal, out of the group to a company controlled by Ma. Add to all this that Ma surely doesn't want to pay a premium to people he doesn't like, for a stake he wishes he hadn't sold at a price that, with hindsight, looks like a steal. Yahoo paid $1 billion less than six years ago for about 40% of Alibaba Group on a fully diluted basis. In the current climate for Chinese Internet stocks, that stake might be worth more than $10 billion now.
The Neptune offer suggests as much. Put together by Ma and Alibaba Group CFO Joe Tsai, the offer included nearly $2.4 billion in cash and $1.15 billion in financing, all backed by a pledge from Ma and Tsai of 120 million Alibaba Group shares valued at $1.065 billion.
The partners putting up the cash included, according to one source, the Shanghai conglomerate Fosun Group, whose chairman Guo Guangchang is a close friend of Ma's, other unnamed wealthy allies and Ma's own private equity group, Yunfeng Capital. Alibaba Group declined comment, and Fosun Group has not responded to a request for comment (disclosure: Fosun publishes the Chinese-language Forbes China under a license agreement).
Did Yahoo solicit this deal, as one source told me, and then walk away? The more pertinent long-term question here is whether Alibaba Group and Yahoo can ever come to an agreement that reduces Yahoo's stake — and at the same time, puts a real price tag on it. Without a deal, it may be a very long time before Yahoo and its frustrated shareholders realize the full value of this investment. Ma is clearly not inclined to relieve that frustration: He is in no hurry to spin out the group's crown jewel, the e-commerce giant Taobao, in an initial public offering, at a time when other e-commerce players are rushing to do so.
It is easy to imagine an IPO valuing Taobao, which has close to 80% of the fast-growing Chinese e-commerce market, at more than $20 billion. Since the group owns most of Hong Kong-listed trading platform Alibaba.com (market cap of $8.4 billion), holds a de facto claim on Alipay and a potentially huge data mining business, a bullish investor could value Alibaba Group at $30 billion. That would mean the Neptune offer of $3.5 billion for 15% was $1 billion short of the mark. (Still, it should be noted that Ma's respectable offer is an indication that Alibaba Group didn't suddenly lose value after the transfer of Alipay, which took place in 2009 and 2010).
It has literally been years since Yahoo's investors were bullish about anything, and they certainly haven't been generous in crediting Yahoo for its Alibaba stake. Investors currently value Yahoo at $21 billion. The combined value of Yahoo's core business, cash and its stake in Yahoo Japan already comes close to that by some estimates. Then again, it is unclear if Yahoo would be able to find buyers outside of Ma willing to pay close to full price to enter into this dysfunctional relationship. Yahoo's investors are not buying the huge value of Alibaba Group — and Yahoo, obviously, is not selling.
