worth billions

Jason 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

RACHEL HANDLER is struggling to say something funny or perhaps amusing or at least clever about horses. Her mind is empty. She can’t recall the last time she was on a horse or even saw a horse. The minutes fly by. Horses are nothing to joke about.

Ms. Handler writes for Groupon, the e-mail marketer that was casually founded in the pit of the recession and almost immediately became a sensation worth billions. The musicians, poets, actors and comedians who fill its ranks are in a state of happy disbelief over the company’s success. In the age-old tradition of creative folk, they were just looking for a gig to support their art. Now stock options have made some of them seriously wealthy, at least on paper.

Poets who work here give away copies of their verse in the reception area. One poem begins like this:

closed my eyes and I was nothing

yeah, I was running

I was nothing

and then I was flying

That just about sums up Groupon’s brief history, which has been meteoric even by dot-com standards. Groupon, which is expected to go public within the next year, is either creating a new approach to commerce that will change the way we eat and shop and interact with the physical world, or it is a sure sign that Internet mania is once again skidding out of control. Or both.

The big Internet companies owe their dominance to something singular that shut out potential competitors. Google had secret algorithms that gave superior search results. Facebook provided a way to broadcast regular updates to friends and acquaintances that grew ever more compelling as more people signed up, which naturally caused more people to sign up. Twitter introduced a new tool to let people promote themselves.

Groupon has nothing so special. It offers discounts on products and services, something that Internet start-up companies have tried to develop as a business model many times before, with minimal success. Groupon’s breakthrough sprang not just from the deals but from an ingredient that was both unlikely and ephemeral: words.

Words are not much valued on the Internet, perhaps because it features so many of them. Newspapers and magazines might have gained vast new audiences online but still can’t recoup the costs from their Web operations of producing the material.

Groupon borrowed some tools and terms from journalism, softened the traditional heavy hand of advertising, added some banter and attitude and married the result to a discounted deal. It has managed, at least for the moment, to make words pay.

IN 177 North American cities and neighborhoods, 31 million people see one of the hundreds of daily deals that Ms. Handler and her colleagues write, and so many of them take the horseback ride or splurge on the spa or have dinner at the restaurant or sign up for the kayak tour that Groupon is raking in more than a billion dollars a year from these featured businesses and is already profitable.

There used to be a name for marketing things to clumps of people by blasting messages at them: spam. People despised it so much it nearly killed e-mail. The great achievement of Groupon — a blend of “group” and “coupon” — is to have reformulated spam into something benign, even ingratiating.

Ms. Handler is working on an offer for Pine River Stables in St. Clair, Mich., a place she has never been to. It is the stables’ first deal on Groupon: $18 for a one-hour ride for two people, half the regular price.

It takes Ms. Handler about 50 minutes to assemble the write-up, which is a few straightforward paragraphs explaining the details with the occasional gag as sweetener (The stables are closed “on Wednesdays, in the event of bad weather and on Horse Christmas.”) She puts off writing the first sentences, the ones that are supposed to seduce every Groupon subscriber in Detroit — either to go horseback riding or at least keep reading Groupon’s e-mails.

Still stumped, she browses an online thesaurus. She studies the Pine River Web site for the umpteenth time. She wishes she lived in a world without horses.

Article source: http://feeds.nytimes.com/click.phdo?i=29c6829075651402aecaa302e7844010

DealBook: Yahoo’s Alibaba Quandary

Deal Professor

View all posts

Funny or Die: Groupon’s Fate Hinges on Words

Recent News

Partners