Doug Young

Corporate China | Alibaba Yahoo dance set for new phase?

Alibaba could make a bid to buy Yahoo as part of a broader overhaul of the relationship between these two internet companies, but personal and other issues could ultimately hamper such a deal.

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A Yahoo! signs sits out front of their headquarters in Sunnyvale, California. Photo: Reuters

Doug Young

Published: 3:43pm, 25 Jan 2015Updated: 3:47pm, 25 Jan 2015

Media have been focused these last two days on reports of a new mega purchase by Alibaba (NYSE: BABA) in the insurance space, but another report centers on a far more intriguing possible deal involving the e-commerce giant's long relationship with faded US search giant Yahoo (Nasdaq: YHOO). That particular relationship has undergone huge changes since the pair first formed their partnership a decade ago, and could easily be the subject of a book. In the latest chapter to that story, a new report is speculating that Alibaba could make a bid for Yahoo in the next year as it seeks to go global following its blockbuster IPO in 2014.

Alibaba has been in the headlines nearly nonstop since last September, when it raised a record $25 billion (HK$194 billion) in a New York IPO that made it one of the world's most valuable Internet companies. Many of the headlines since then have involved acquisitions and strategic tie-ups, as Alibaba tried to show the world why it was worth more than other premier Internet names like Amazon (Nasdaq: AMZN) and Twitter (NYSE: TWTR).

In the latest of those moves, media reported this week that Alibaba was in talks to buy an unspecified stake in New China Life (1336.HK; Shanghai: 601336), one of the nation's leading life insurers, in a deal that would probably be worth more than $1 billion. Such sums are increasingly trivial for Alibaba, which has a cash pot with nearly $18 billion and easy access to billions more in credit.

But a more interesting report has just come out speculating that Alibaba could make a bid for former strategic partner Yahoo later this year. The speculation centers on what Yahoo chief executive Marissa Mayer will say on January 27, when she's set to announce her company's plans for a large stake it now holds in Alibaba. Yahoo initially paid $1 billion for 40 per cent of Alibaba a decade ago, when the former was a much larger company than the latter. Yahoo has sold off some of that stake since then, but is still a major Alibaba shareholder.

Since forming their first alliance in 2005, the two companies have moved in opposite directions, and Alibaba is now worth more than five times Yahoo's current market valuation of about $46 billion. What's more, a big chunk of Yahoo's current value comes from its holding of 384 million Alibaba shares, which are worth about $40 billion. Without its Alibaba shares, Yahoo would be a much smaller company in terms of market value.

All of that raises the intriguing prospect that Mayer could announce plans to sell Yahoo's remaining Alibaba stake, which could prompt Alibaba to engineer a deal that might ultimately see it buy the US company. Such a deal might see Alibaba join with some big institutional buyers to purchase its shares from Yahoo. Once that happens, Alibaba could then launch a bid for the remaining Yahoo.