Nationalism And Protectionism In The Alibaba-Yahoo Dispute

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  • on May 15th, 2011

Alibaba Group CFO Joseph Tsai, speaking Saturday at the Alibaba.com shareholders meeting, revealed that Alibaba has told Yahoo it needs to sell down its stake because the government is unhappy with the level of foreign ownership in the company. As Bloomberg reports in “Alibaba Says Alipay Spinoff ‘Lawful’ After Yahoo’s Failed-Disclosure Claim“:

It’s “inappropriate” for Internet companies in China to have high foreign ownership given the increasing regulations on overseas investment rules in the industry, Alibaba Group Chief Financial Officer Joseph Tsai said at the meeting today. Alibaba has raised this issue with Yahoo, he said.

If Alibaba has a regulatory problem with foreign ownership then other Chinese Internet companies probably have issues too.

Tencent, arguably even more strategic than Aliababa given its QQ communications platform and payment service, is 35% owned by South Africa’s Naspers, and majority owned by foreigners when you include public shareholders. Renren, between its America CEO and foreign institutional investors, also has a very high level of foreign ownership. Those are just two examples of a long list of Chinese Internet companies with significant, and possibly majority, foreign ownership (see China’s Internet: The Invisible Birdcage and Internet May Be The Largest Industry In China Not Dominated By State-Owned Firms for longer discussions of foreign participation in the Chinese Internet.)

Is Alibaba signaling a government shift that may see many of the Chinese Internet firms forced to reduce foreign ownership? And if the government really is unhappy with foreign ownership in the Internet sector, why is it allowing so much foreign venture capital investment and so many overseas IPOs?

Or is Jack Ma using the threat of government displeasure to force Yahoo to sell, likely at a discount? Jack Ma cut a bad deal for Alibaba, he knows it, and he will use whatever plausible arguments he can to extricate Alibaba from the Yahoo deal.

My guess is that the government is unhappy that Jack Ma allowed his company to become 60%+ owned by American and Japanese firms but Alibaba is likely overstating the issue as a negotiating tactic, assuming, probably correctly, that Yahoo is so clueless that they will sell at a discount.

Shi Yuzhu, CEO of NYSE-listed Giant Interactive, added a nationalistic element to the debate last week. Shi, who is partners with Jack Ma in Yunfeng Capital, wrote on his Sina Weibo that if Yahoo is unwilling to sell down its stake then Jack Ma should be a “patriotic hooligan” and screw them:

“Congratulations on Alipay’s return to China. With an annual cash flow of 2000 billion yuan, if Alibaba’s major equity were still in the hands of Americans and Japanese, China’s national security would be affected. Now it’s the ideal time that we oblige Yahoo and Japan’s Softbank to sell part of their equity to the Chinese government and companies. If they don’t, we must act like heavy and ignore Yahoo and Softbank when there are new businesses. I recommend Jack Ma to be a patriotic hooligan.”

Foreign shareholders of Giant Interactive may not appreciate these sentiments from the CEO of their US-listed company.

Will investors cool on Chinese Internet stocks if they think nationalism and protectionism are increasing risk factors?

Full disclosure, I bought shares of Yahoo last week after the Alipay news broke.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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