Alibaba’s Bid for Yahoo Makes Sense if Shareholders and Authorities Consent

With the Alibaba Group touted as one of the leading contenders to buy Yahoo (NASDAQ:YHOO), ^[1] the China-based e-commerce giant could gain back control of its 43% stake held by Yahoo and make its splash in the US market in one fell swoop. A struggling online advertising giant, Yahoo is hoping to remain an industry leader despite questions on its direction following CEO Carol Bartz’s ouster and intense competition from Google (NASDAQ:GOOG) and Facebook. While we believe this deal makes sense given Alibaba’s interest and intimate knowledge of Yahoo USA, Alibaba would almost certainly face scrutiny from Yahoo shareholders as well as US authorities nervous of a large Chinese Internet company owning Yahoo.

See our full analysis for Yahoo

Alibaba Has Certain Advantages Over Other Bidders

Despite the presence of other high-profile bidders that have expressed their interest in Yahoo like Silver Lake and Marc Andreessen – Alibaba has a few distinct advantages in bidding for Yahoo. ^[2]

1. Regaining Its Assets: Yahoo’s 43% stake in Alibaba is the single-largest contributor to Yahoo’s value by our estimates, standing at close to $12 billion before taxes. With Yahoo and Alibaba having run into loggerheads previously with Alipay, ^[3] Alibaba founder and CEO Jack Ma wants to ensure complete control of his group once again, given the shaky leadership at Yahoo following Carol Bartz’s departure.

Moreover if a 3rd party acquired Yahoo, then it would have a large stake in Alibaba as well creating several issues for Alibaba. Would this new group want to sell the stake in Alibaba, and if so, at what price? What would its plans be with Yahoo’s other Asian assets?

2. Alibaba Can Expand in U.S.: Although Yahoo has seen declining revenues in its core online advertising business, the company still commands a large share of Internet traffic in the U.S. with over 177 million unique visitors in August alone ranking it second behind Google in traffic. ^[4] While Alibaba.com already rules the roost in the e-commerce segment for small businesses in China with around 69 million registered users, ^[5] the company has the opportunity to expand its user base even further through Yahoo’s U.S. traffic.

We believe that this union could make a lot of sense for Yahoo as there aren’t many companies large enough or that would fit strategically as Alibaba, which is already looking to make further inroads in the US. Alibaba is motivated as it certainly doesn’t want other large Chinese or Japanese players taking over Yahoo as this would transfer a large chunk of its ownership to more direct competitors.

These obvious gains aside, there might be some potential stumbling blocks between Alibaba CEO Jack Ma and Yahoo investors following years of tense relations with Bartz at the helm.

U.S. regulators will also have several issues surrounding Alibaba’s independence from the Chinese government and its access to private email accounts and data storage for one of the largest global Internet properties.

So any bid would need to have firm plans for navigating these challenges such as keeping the two firms as separate entities to help ensure privacy concerns are met in addition to reaching a value for the firm that could win shareholder approval.

We have a revised price estimate of $18 for Yahoo’s stock, which is about 30% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Bloomberg Businessweek: Ma’s Alibaba Turns to Potential Bidder from Investment for Yahoo [↩]
2. AllThingsD: Yahoo for Sale: Possible Bidders Circling – including Marc Andreessen –  as Board Pressure Mounts [↩]
3. Reuters: Yahoo, Alibaba reach deal over Alipay [↩]
4. comScore: Top 50 U.S. Web Properties for August 2011 [↩]
5. Alibaba Group Company Overview [↩]