Alibaba and Yahoo could live unhappily ever after

3 min read
Asia

Talks on Alibaba buying back Yahoo’s stake in the Chinese e-commerce giant seem to have faltered. Valuation, structure and financing appear to be the key roadblocks. With more strain added to the unhappy relationship, Yahoo and Alibaba need to rebuild trust before heading back to the negotiation table.

Founder Jack Ma wants to take back control of Alibaba. Relations with the U.S. group soured due to an earlier spat over its payment unit Alipay, and Yahoo’s attempt to appoint more directors at the Chinese company. Ma was trying to buy the bulk of Yahoo’s 43 percent stake in a complex transaction worth up to $9 billion.

Disagreement over valuation appears to be the main challenge. Yahoo is holding out for a better offer, saying Alibaba’s value has increased during the discussions, according to people close to the matter. But putting a price on a stake in a private company that has grown some 30-fold over seven years is certainly not easy, especially if trust has broken down between the partners.

The structure of the deal also looks a bit too smart. Under the details of the deal being talked about, Alibaba would inject up to $6 billion of cash and $3 billion of assets into a new subsidiary. The idea is to make the transaction tax-free for Yahoo. One snag is that Yahoo may be eyeing assets that Alibaba doesn’t yet own, such as some businesses in the United States. Another is that the Internal Revenue Service may deem it a sale anyway, which would be taxable, as opposed to a tax-free asset-shuffling.

A tough financing market adds more uncertainty. Alibaba was looking to borrow $4 billion from a group of six to seven banks, but had to cut the size of its debut loan to $3 billion, according to Reuters. The loan market is tight, as many European banks are cutting lending activity in Asia.

Both companies have good reason to return to the table. Yahoo’s board needs to make sure that it doesn’t let another good opportunity slip, after being blamed for spurning Microsoft’s $45 billion bid in 2008. Activist investor Daniel Loeb, of hedge fund ThirdPoint, is adding pressure by campaigning to install his own slate of directors on Yahoo’s board. He argues that Yahoo is undervalued and is likely to demand more value being extracted out of the Alibaba stake. Ma, for his part, wants to be free of Yahoo.

But the best incentive for clinching a deal is the prospect both companies face of being stuck in their unhappy marriage if they can’t find a way to compromise.