May 28, 2023

DealBook: Yahoo and Alibaba Resolve Alipay Dispute

Carol A. Bartz, left, chief of Yahoo!, and Jack Ma, chief of Alibaba Group.Ramin Talaie/Bloomberg News and Jason Lee/ReutersCarol A. Bartz, left, chief of Yahoo!, and Jack Ma, chief of Alibaba Group.

After a simmering feud that reached soap opera proportions, Yahoo and the Alibaba Group, the Chinese Internet company it partly owns, have reached an agreement on Alipay, a Chinese payments processing company.

Alongside Softbank, a major Alibaba investor, the companies announced on Friday a multipronged deal that guarantees Alibaba certain payments in the event of an Alipay public offering or other liquidity event. If Alipay does go public, Alibaba will be paid at least $2 billion plus certain licensing fees. Under the agreement, Alipay has also agreed to maintain its current relationship with Taobao, one of Alibaba’s top e-commerce companies.

“Over the last few months, we have worked cooperatively with our partners at Yahoo! and SoftBank to reach an agreement that serves the interests of all parties,” Jack Ma, Alibaba chief executive said in a statement. “Most importantly, Alipay was able to secure the license it needed to continue operating.”

The resolution is a welcome one for Alibaba’s investors, Yahoo and Softbank, which have been trying to hammer out a deal with Alibaba for several months. Last year, Mr. Ma spun Alipay out of Alibaba to secure licenses to operate as an electronic payments platform, amid new regulations in China. The company’s partners cried foul in May of this year, with Yahoo and Softbank claiming that they had not approved the spinoff and only learned about the deal in March. The debacle irked investors, who were bothered by Yahoo’s lack of knowledge and the loss of Alipay’s value to Alibaba’s portfolio.

David Einhorn, the influential hedge fund manager of Greenlight Capital, dumped his entire stake in Yahoo, saying in a letter to investors that this “wasn’t what we signed up for.”

In the immediate aftermath, shares of Yahoo lost about a third of their value. Yahoo’s 43 percent stake in Alibaba is considered by many to be its crown jewel, worth more than the company’s domestic business, which has struggled to regain turf from rivals like Google.

“This is a good outcome for Yahoo! and for our shareholders, as well as all the parties to this agreement,” Carol Bartz, the chief executive of Yahoo said in a statement on Friday. “As a result of this constructive process, we have an agreement that preserves the value of Taobao, provides for profit sharing at Alipay, and creates a structure to allow Alibaba Group to participate if Alipay’s value is realized in an I.P.O. or other liquidity event.”

Under the terms of the agreement, Alibaba will receive “no less than $2 billion and no more than $6 billion in proceeds,” in a Alipay liquidity event. The amount of the proceeds will be calculated by multiplying Alipay’s valuation by 37.5 percent. The formula implies that Alibaba expects Alipay to be worth at least $5.3 billion in the event of a public offering.

While the agreement does bring resolution to a contentious issue, investors remained cautious on Friday.

Shares of Yahoo initially traded higher, before falling about 3 percent in morning trading, after a conference call in which both Mr. Ma and Ms. Bartz were both noticeably absent. Their lack of attendance fanned concerns, among some analysts, that the deal has not mended the rift between the two companies.

“On the face of it, it seems like a good deal for Yahoo, given how acrimonious the relationship with Jack Ma and Carol Bartz had become and how little leverage Yahoo had,” Jordan Rohan, a Stifel Nicolaus analyst told DealBook on Friday. But he said the drama also exposed how Yahoo’s fate in Asia is dictated by the whim of Mr. Ma.

“Even if the ownership of the rest of Alibaba group is not altered, the path forward seems to be controlled 100 percent by Jack Ma and his team,” he said.

The possible heavy hand of China’s government also looms large. Given the country’s strict regulatory environment, analysts raised doubts on Friday that an Alipay offering will come soon or be as lucrative as Yahoo hopes.

“They did not give any clarity on a potential timeline for an I.P.O.,” said Scott Kessler, an analyst with Standard Poor’s. “The Chinese government also seems focused on domestic ownership for this company, thus making any global I.P.O. unlikely if not impossible.”

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