January 27, 2021

DealBook: Alibaba Said to Seek Billions to Buy Back Yahoo Stake

Alibaba's headquarters in Hangzhou, China. The online retailer wants to repurchase part of Yahoo's stake for $7.1 billion.Nelson Ching/Bloomberg NewsAlibaba’s headquarters in Hangzhou, China. The online retailer wants to repurchase part of Yahoo’s stake for $7.1 billion.

The China Investment Corporation is in advanced talks to add as much as $2 billion to the Alibaba Group to help finance the Internet company’s efforts to buy back a stake from Yahoo, a person briefed on the matter said on Thursday.

The Chinese Investment Corporation, known as C.I.C., a $200 billion Chinese sovereign wealth fund, is one of several potential partners from which Alibaba would raise money to pay for the stake repurchase. On Sunday, Alibaba announced a long-awaited deal to buy back half of Yahoo’s 40 percent stake in the company for $7.1 billion.

To finance the purchase, Alibaba is raising about $4.6 billion in total. The Chinese Internet company is holding talks with a number of other firms, including Temasek, a Singaporean sovereign fund; DST Global, the Russian investment firm; and the Blackstone Group, according to the person and others briefed on the discussions, who sought anonymity because they were afraid they would lose their jobs.

The pact with Yahoo values Alibaba at about $35 billion, though that figure could rise if the Chinese company is able to raise financing at a higher valuation.

Over the last several years, Alibaba has undertaken several moves that could lead to its transformation, including steps toward an initial public stock offering down the road. On Thursday, Alibaba was completing the takeover of its publicly traded subsidiary, Alibaba.com.

But the biggest move has been securing an agreement with Yahoo over the repurchase of the stake, which begins the unwinding of an often tense partnership.

While Yahoo’s investment in Alibaba in 2005 helped the Chinese company become a premier Internet and e-commerce player in that country, the two have clashed over a number of issues. Perhaps the bitterest conflict began in 2010, when Alibaba decided to spin off Alipay, its online payment business. Yahoo protested that it had not been properly consulted before the move, setting up a battle that was resolved only last summer.

Alibaba first sought to buy back some of the stake Yahoo held several years ago, but the American company backed out late in the process. The abrupt end to the discussions was believed to have rankled Jack Ma, Alibaba’s chief executive, who felt that the break had hurt his relationships with companies that had agreed to back that first repurchase agreement.

Alibaba and Yahoo resumed talks late last year, hoping to reach a deal on a complicated transaction known as a cash-rich split, which would have amounted to a tax-free asset swap. But those talks ran aground earlier this year over a number of concerns, including breakup fees and the valuation of Alibaba.

The two tried again in March, aiming for a simpler deal in which the Chinese company would buy back some of its stake directly. Talks between the two companies — led by Alibaba’s chief financial officer, Joe Tsai, and his Yahoo counterpart, Timothy R. Morse — proceeded smoothly in the final effort at negotiations, with many details being decided fairly quickly.

It now appears that a new détente has emerged. Yahoo, for instance, has agreed to give up certain voting powers and an ability to name a second director to Alibaba’s board as part of the stake repurchase agreement announced on Sunday.

That may help allay concerns by Chinese regulators that Alibaba is controlled by foreign investors, worries the company has been keen to eliminate.

News of Alibaba’s talks with C.I.C. was reported earlier by Reuters.

Article source: http://dealbook.nytimes.com/2012/05/24/china-investment-corp-in-talks-for-alibaba-stake/?partner=rss&emc=rss

DealBook: Yahoo’s Alibaba Quandary

Jack Ma, Alibaba's chief executiveJason Lee/Reuters Jack Ma, Alibaba’s chief executive, could hold up a sale of Yahoo.

As Yahoo explores its future, one of the board’s top considerations is what to do about the company’s 43 percent stake in Alibaba, the Chinese Internet giant.

The stake, Yahoo’s crown jewel asset, is worth billions of dollars and provides the company a foothold into China. The problem is that Yahoo has an agreement that gives Alibaba’s shareholders the option to repurchase the stake through a right of first refusal. Alibaba’s chief executive, Jack Ma, desperately wants to acquire Yahoo’s shares and will no doubt try to exercise this right.

That means Yahoo’s options are even more limited than people think.

A right of first refusal is a mechanism that parties agree to in order to control who owns the shares in their company. If one group wants to sell its stake, the other shareholders can then exercise their right of first refusal and purchase that stake.

Deal Professor
View all posts

Rights of first refusal can be quite valuable. They not only ensure that shareholders can control who owns the company, but they can also be a thorn in the side of a shareholder who wishes to sell. The reason is that third parties will refuse to bid for the shares knowing that any bid might be wasted because the other shareholders will exercise the right of first refusal.

In Alibaba’s case, it’s a likely scenario. If that happens, suitors will need to pay a high price to ensure Alibaba’s shareholders do not bid — or suitors may not make a bid. As such, Yahoo could be in a position where the only possible buyer is Alibaba. Alibaba shareholders know this too, and they could use it to their advantage by making a low-ball bid.

The right of first refusal clearly applies to any effort by Yahoo to sell its Alibaba shares. However, a close reading of the stockholders agreement shows that the right of first refusal may also be triggered if there is a sale of Yahoo itself. If Yahoo is sold, a bidder for the entire company may not be able to count on receiving one of Yahoo’s major assets. In addition, even if the bidder was willing to sell the Alibaba shares, the price mechanism here may mean that the bidder would receive less for these shares than it otherwise might.

The language in the stockholders agreement states that if Yahoo wants to “transfer” any shares, it is subject to the right of first refusal. The issue comes about because “transfer” in the agreement is defined as “any sale, transfer, assignment, gift, disposition of, creation of any encumbrance over or other transfer, whether directly or indirectly, of the legal or beneficial ownership or economic benefits of all or a portion of the equity securities.” Alibaba will claim that the sale of Yahoo itself is an indirect transfer of the Alibaba shares, triggering the right of first refusal.

The argument is not a certain winner. First, the parties could have specifically stated this in the agreement, but they did not. This is yet another example of lawyers drafting vague language possibly by mistake.

Second, the mechanics of the right of first refusal require that the original shareholder first get an offer from a third party. This establishes a price that the other Alibaba shareholders can pay if they exercise the right of first refusal.

In a full sale of Yahoo, there is no price set for the Alibaba shares, only for all of Yahoo itself. Yahoo could also argue that “indirect” in this case refers only to the actual shares and is inserted to cover futures and other derivatives.

Alibaba could counter that the language about indirect transfers was meant to include an entire sale. This argument is buttressed by the fact that the clause talks about transferring the economic benefits of ownership, which is what would happen in a full Yahoo sale.

In addition, it appears the agreement was drafted to ensure that Alibaba shareholders retained control of the corporate ownership. Finally, to determine the price of the Alibaba shares, you can simply do a valuation analysis that attributes part of the full sale price to the stake.

But Alibaba may not need to win this argument. The stockholders agreement requires that if there is any dispute, it is subject to confidential arbitration in Singapore before three arbitrators. This process could not only send teams of lawyers to Singapore as proceedings drag on for perhaps years, the outcome would be uncertain.

And remember that the Chinese regulatory authorities can likely block any transfer. Mr. Ma may no doubt have some influence there, too. Finally, any purchase of Yahoo or its Alibaba stake will want to be in the good graces of Mr. Ma, something that he is unlikely to bestow if he loses out on purchasing this stake.

Alibaba can thus simply invoke the right of first refusal and hold up any full sale of Yahoo or force a third party to deal with Alibaba. While a bidder could proceed and decide to litigate the matter, this may make financing for the acquisition much more difficult. It also may not be a risk that an acquirer is willing to bear or will factor in the price it is willing to pay for Yahoo.

The right of first refusal is likely yet another reason why Yahoo is reportedly focused on selling only a minority interest in itself rather than a full sale or a sale of the Alibaba stake. A sale of the Alibaba stake may not yield the best price, while a sale of Yahoo itself has murky consequences.


Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://feeds.nytimes.com/click.phdo?i=f36fbe563c468fc65d67305b45d0ece9

Alibaba and Yahoo Try to Make Up

But just as quickly as it began, Yahoo and the Alibaba Group, the Chinese Internet giant that Yahoo partly owns, said Sunday that they were working to resolve the fight.

The announcement is a bid to end a feud that erupted after Yahoo said in a regulatory filing last week that Alibaba had transferred the assets of its online payment unit, Alipay, to a Chinese company controlled by Alibaba’s chief executive, Jack Ma.

Shares of Yahoo plunged after the statement over concern that the transfer may have eroded the value of Yahoo’s holdings in Alibaba, one of its prized assets.

Confused by the dispute, investors punished Yahoo’s stock last week, wiping out more than $2 billion in market value. Investors had bid up shares of Yahoo in recent months, partly because of projections about the future value of its Alibaba holdings.

Some investors accused Yahoo of failing to properly disclose the asset sale; others said the sale could be a sign that Yahoo was losing control of its stake in Alibaba.

The fight over the asset sale has become the latest wedge in a partnership that began five years ago, with a confetti-filled news conference in Beijing to announce that Yahoo had agreed to pay $1 billion for a 40 percent stake in Alibaba. As part of that deal, Alibaba also agreed to take control of Yahoo’s Chinese language Web site.

Since then, Alibaba has grown into a Chinese Internet powerhouse, with an array of fast-growing units, including a business-to-business Web site called Alibaba.com.

Yahoo, on the other hand, has had its fortunes decline after a takeover battle with Microsoft and the decision of a co-founder, Jerry Yang, to step down as chief executive. He was succeeded by Carol Bartz in January 2009.

With Google holding much of the online search market and Facebook the dominant social networking site, investors believe much of Yahoo’s value is tied to Asia, locked up in its stakes in Yahoo Japan and China’s Alibaba.

Investors in Yahoo became nervous after privately owned Alibaba last week released a series of statements saying the asset transfer began in July 2009 and was completed a year later.

Alibaba executives say the transfer was legal and necessary because of China’s new regulations governing electronic payment platforms. But on Friday, Yahoo suggested that it did not know about the transfer of the Alipay division until this March and that Yahoo and other Alibaba shareholders had not approved the sale.

“There is clearly bad blood between Jack Ma and Carol Bartz,” said Colin Gillis, an analyst with BGC Financial. “The soap opera continues.”

The two companies on Sunday, however, said they would work with another Alibaba shareholder, Japan’s Softbank Corporation, to resolve the issue. Japan’s Softbank and Yahoo together own about 70 percent of the Alibaba Group.

“Alibaba Group, and its major stockholders Yahoo! Inc. and Softbank Corporation, are engaged in and committed to productive negotiations to resolve the outstanding issues related to Alipay in a manner that serves the interests of all shareholders as soon as possible,” Yahoo and Alibaba said in a joint statement.

John Spelich, an Alibaba spokesman in Hong Kong, said Sunday that the Alibaba Group had already received some compensation for Alipay, though he declined to say how much.

Speaking on Saturday at an annual general meeting in Hong Kong, Mr. Ma, the Alibaba chief, said that the transfer was made to help Alibaba’s fast-growing e-commerce site, Taobao, which uses the Alipay system.

“If Alipay were illegal or didn’t get the license, Taobao would be paralyzed,” Mr. Ma said referring to the Chinese government’s new requirement regarding online payment licenses. “If Taobao were paralyzed, how could Alibaba reform and develop?”

Yahoo, which is based in Sunnyvale, Calif., declined to comment over the weekend. But a person close to the company said that Yahoo executives knew as early as 2009 that a majority stake in Alipay would be transferred temporarily but the company was unaware until March that the transfer had been completed.

David Barboza reported from Shanghai and Verne G. Kopytoff from San Francisco.

Article source: http://www.nytimes.com/2011/05/16/technology/16yahoo.html?partner=rss&emc=rss