Sorry Yahoo But Jack Ma Is The Only Buyer Of Your Alibaba Stake

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  • on September 16th, 2011

Realistically there is only one buyer for Yahoo’s China assets–Jack Ma and whatever investor group he arranges. Of course other groups can and may bid, and legally Mr. Ma can not block them from buying Yahoo’s ($YHOO) shares, but practically speaking he can torpedo any transaction.

As Gady Epstein reported in Forbes a few months ago, Mr. Ma has already led at least one failed bid by a group of local PE firms and billionaires to buy a significant portion of Yahoo’s stake in Alibaba.

The growing uncertainty over foreign ownership in Chinese Internet firms and Mr. Ma’s demonstrated willingness to break contracts when it suits him should give pause to any responsible foreign buyer. Tom Orlik made this point a couple of weeks ago in the Wall Street Journal:

Alibaba’s recent behavior reduces the chance that they will face tough competition from outside bidders or anyone not confident of building a strong relationship with Mr. Ma and his team. The transfer of Alipay, the online-payments part of the business, into a private company controlled by Mr. Ma, without the approval of Yahoo, made some investors think that Alibaba might have learned a thing or two from the 40 thieves.

Adding to concerns, the Ministry of Commerce announced last month that Chinese companies that use a popular contractual arrangement to get around limits on foreign investment may be subject to extra scrutiny going forward. Alibaba cited rules preventing foreign ownership of online-payments systems as justification for transferring Alipay out from under Yahoo’s control. Regulatory uncertainty further reduces the chances outside buyers will bid up the cost of Alibaba.

Alibaba is the greatest treasure in Yahoo’s cave. But it might be that only Mr. Ma knows the magic words necessary to open it.

Bloomberg reported Friday that Silver Lake Is Said to Consider Acquiring Yahoo, Then Selling Asian Assets. The Silver Lake folks are very smart. They must understand that Mr. Ma and friends are the only realistic buyers of the Alibaba stake, that signaling they will sell the asset in part to help fund the deal may make them appear to be a “forced seller”, and so therefore the price for the Alibaba asset may be significantly lower than what the market expects.

It is a bad time to sell the Alibaba stake. Valuations of Chinese stocks are down, the market is very choppy, and the government has created a cloud of uncertainty about potential new Internet regulations in China. Alibaba will likely be worth more following IPOs by China e-commerce leaders Vancl and 360buy and eventual clarity around the regulatory environment.

The best scenario for Yahoo shareholders (sadly I am one) might be an acquisition by Microsoft ($MSFT). In his original deal Mr. Ma did not include any rights around a change of control at Yahoo. Microsoft is a strategic, not a financial buyer, and so would be under no pressure to sell the stake.

Mr. Ma (and likely the Chinese government) clearly prefers to buy back the stake, but given Microsoft’s approach to China he might be able to live with a new American partner.

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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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