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Alibaba chief confirms Yahoo! interest

by Olaf de Senerpont Domis | Published October 3, 2011 at 4:48 PM

Yahoo! Inc. shares spiked nearly 9% to $14.04 in morning trading Monday, Oct. 3, after Jack Ma, CEO of Chinese Internet giant Alibaba Group Holding Ltd., said he was interested in buying the struggling Web company.

Speaking to a gathering at Stanford University in Palo Alto, Calif., Friday, Ma said he has been approached by private equity firms about a potential group bid for Yahoo!.

Ma's comments cap weeks of speculation about a Yahoo! takeover, as well as the fate of the company's 40% stake in Alibaba.

"I see Alibaba as the lead horse in a multiple-horse race to acquire Yahoo!," Susquehanna Financial Group LLLP analyst Herman Leung said in an interview. He predicted that a corporate takeover is more likely than a purchase of Yahoo! by private equity firms, and said that Alibaba's Ma has a strong understanding of how Yahoo! works.

"We believe if Jack Ma was to become Yahoo CEO it could potentially re-energize a company tired of market share losses in both its display and search marketplaces," Leung wrote in a research note Monday.

A group of investors including Silver Lake and DST Global late last month invested $1.6 billion in Alibaba. The price tag valued Yahoo!'s Alibaba stake at $9.50 per Yahoo! share, according to some estimates, which represents significantly more than half of the company's recent stock price. Microsoft Corp. also has repeatedly been mentioned as a potential buyer for Yahoo!, with or without private equity firms at its side.

But, having already gained an exclusive licensing agreement for Sunnyvale, Calif.-based Yahoo!'s core search technology, and having been rebuffed three years ago when it offered $33 per share to acquire the company outright, the odds of a Microsoft takeover seem long.

Speculation about a Yahoo! acquisition flared up after the company's board ousted its CEO Carol Bartz on Sept. 6. Then, on Sept. 23, a memo surfaced from co-founders Jerry Yang and David Filo and chairman Roy Bostock that confirmed the company had hired Allen & Co. to help it pursue strategic options. The memo also said that the company has commenced its search for a new CEO; currently Yahoo! chief financial officer Tim Morse has taken the role as interim CEO.

A variety of scenarios could arise for a buyout of Yahoo!. Alibaba could buy back its ownership interest and sell Yahoo!'s U.S. assets and its roughly 35% stake in Yahoo! Japan to private equity firms, or a private equity firm consortium could lead the deal.

Regardless, there could be various complications to completing a deal, including potentially onerous taxes, as well as regulatory concerns over Chinese ownership of a major U.S. Internet company. Alibaba could face challenges in financing an acquisition as well, Leung said.

As the speculation about Yahoo!'s fate continues, analysts are anticipating lackluster results when the company reports its third-quarter earnings Oct. 18, thanks to all the uncertainty, executive departures and weakness in the display advertising market. As Bank of America Merrill Lynch analyst Justin Post put it in a research note Monday, the strongest lift for Yahoo! shares this quarter will be continued speculation about a potential acquisition -- not improvements in its business.

"The key reason to own Yahoo! is asset value ... and deal opportunity resulting from a potential bid by various private equity groups," Post wrote. "We think activist investors, lack of a CEO and weaker 3Q results could make a Yahoo! deal more likely."

While Leung predicted that Alibaba is the most likely buyer of Yahoo!, the complexity of structuring such a transaction could take some time to negotiate.

"Although I think some kind of deal is inevitable, the structuring, financing and complexities of dealing with multiple parties makes me cautious about looking at this as a near-term deal," he said.

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Olaf de Senerpont Domis

Bureau chief, West Coast; Editor, venture capital

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