Chinese Internet firm Alibaba is set to speed up plans to buy back a near 40 percent stake owned by Yahoo, as Microsoft threatens to go hostile with a lower bid for Yahoo.
Paul Sakuma
Yahoo!'s headquarters in California.
Alibaba, keen to calm Beijing's fears that Microsoft's planned $42 billion takeover of Yahoo would increase foreign influence over China's leading Internet firms, wants to fund a buyback of all or part of the 39 percent stake Yahoo owns, said a person familiar with the Chinese firm's plans.
Analysts said this could come from a mix of foreign and local financial investors, including Chinese pension funds or state-backed firms looking to enter the Internet sector.
"Jack's number-one thing is to maintain control," said Hany Nada, managing partner of Granite Global Ventures, an early institutional investor in Alibaba, referring to the group's Chief Executive Jack Ma.
Alibaba plans to exercise its "right of first offer" on the stake, which is stated in a 2005 agreement with Yahoo , should the two U.S. firms reach a deal, a source told Reuters earlier.
The "right of first offer" states that Yahoo cannot transfer its Alibaba stake without first offering it to other shareholders. Alibaba believes any change of control at Yahoo, including a deal with Microsoft , would amount to such a transfer, the source said.
Losing Out
Alibaba may be unwilling to rule out potential business opportunities with Microsoft, for example in advertising or online trading, that would be lost if it were to buy back its stake from Yahoo.
If that were to happen, the US software giant also could miss a chance to expand its foothold in the world's largest Web market by users.
"Alibaba is peripheral to the potential Microsoft/Yahoo transaction, but its decision will create an impact on Microsoft's deal because Alibaba is an important strategic presence for Yahoo in Asia, and Alibaba has global aspirations," said Duncan Clark, chairman of Beijing-based research firm BDA.
Another thorny factor is valuation.
Yahoo has so far rejected Microsoft's unsolicited takeover bid as too low, in part because Yahoo sees its Asian operations as strategically valuable.
Any offer on the stake in Alibaba -- particularly if it is broken up and sold to several investors -- will likely go through a complicated arbitration process to determine the offer's value.
Perhaps the most important factor is whether Alibaba is able to line up financial support to buy back its stake from Yahoo.
Possible candidates include Chinese pension funds, or even one of the country's state-backed telecoms companies looking to move into Internet services, said Claus Mortensen, analyst at IDC's Asia/Pacific Emerging Technologies Research.
Alibaba's other major shareholder, Japan's Softbank, which holds a 33 percent stake, is unlikely to buy Yahoo's stake as it is heavily in debt after buying Vodafone's Japan unit two years ago.
"There's no way we could raise funds in this environment. We bought Vodafone (Japan) just in the nick of time. We were lucky," said a Softbank contact, who declined to be identified because he was not authorized to speak on the matter.
The Struggle to Stay Independent
Beijing is often wary of what it sees as attempts by foreigners to control prominent Chinese companies.
Alibaba dominates China's business-to-business sector with a 70 percent share of a market that is expected to grow to 2,130 billion yuan ($303.6 billion) in 2009 from 1,250 billion yuan in 2007, according to the Internet Society of China.
Alibaba is expected to maintain its dominant position in the short term, said Ovum analyst Charice Wang, but over the longer term local rivals offering niche services may eat into that lead.
Beijing was stung by its exposure to a foreign firm shortly after a 2005 deal in which Yahoo merged its Chinese operations into Alibaba in exchange for the stake in Alibaba.
Along with Yahoo's operations, Alibaba also gained a role in an international human rights controversy when press freedom watchdogs and U.S. lawmakers attacked Yahoo for turning over a Chinese reporter's emails to the government, which later imprisoned him.
If the Microsoft-Yahoo deal goes through and Yahoo retains its stake, the Chinese authorities are likely to set conditions for the stake's transfer, such as limiting the number of foreigners on Alibaba's board.
Right of First Offer
Even if Alibaba manages to shore up finances to buy back its stake from Yahoo, there is a small chance its interpretation of the "right of first offer" might be challenged by a combined Microsoft-Yahoo entity. Both companies have declined to comment on Alibaba's interpretation of the right.
But one lawyer said Alibaba's right of first offer -- which applies to both a direct and indirect transfer of Yahoo's stake -- may not apply in case of a change of ownership of Yahoo.
Alibaba's position is that if Microsoft buys Yahoo, what it gets is ownership of Yahoo's stock and not Yahoo's ownership in Alibaba, said the lawyer, who declined to be identified because his firm could advise one of the companies.
So, if Yahoo is bought, Alibaba's argument is that it amounts to an indirect transfer and triggers the right of first offer, but New York state laws govern the definition of 'indirect' in this case, said the partner at a US law firm who has worked on international M&A transactions.
"Microsoft, it seems, unless there is language or other terms elsewhere, simply will step into the shoes of Yahoo in the Alibaba agreement," he said.
But Carol Glendenning, a mergers and acquisitions lawyer at Strasburger and Price LLP, said that "a sale of Yahoo stock would be an indirect transfer of the beneficial ownership that Yahoo owns in Alibaba, which falls into the definition of a transfer."
Both lawyers based their assessment on excerpts of the agreement sent to them by Reuters.
Under the 2005 agreement, which is available on the Securities and Exchange Commission Web site, Yahoo also has a pre-emptive option of refusing to sell to a list of competitors.
But the lawyers said the pre-emptive option applies only if Alibaba plans to issue new shares in case of a transaction.