In Yahoo-Alibaba Showdown, Alibaba FTW!

Chairman Jack Ma Wins Right to Spin off Subsidiary Alipay Without Approval of Largest Shareholder

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For U.S. web companies with global ambitions, it doesn't get any more complicated than China.

Just ask Yahoo, which for the better part of a year has been in a very public feud with Jack Ma, chairman of Alibaba Group, in which Yahoo owns a 40% stake. Now, in the latest round, it looks like Alibaba has won in the two companies' dispute over China's answer to PayPal, Alipay.

Yahoo was stunned to learn early this year that Alibaba had quietly spun off Alipay to another firm under Alibaba Chairman Jack Ma's control. The move effectively divested Alibaba and its shareholders of the unit, and the news sent Yahoo's shares tumbling amid concerns that the Sunnyvale-based company had lost significant value.

Today the two companies, along with Japanese shareholder Softbank Corporation, came to an agreement that blesses Mr. Ma's maneuver and keeps Alipay entirely under his control. The deal also diminishes Alibaba Group's stake in Alipay from 100% to 37.5%, with the further restriction that should the payments company be sold or put on the public market, Alibaba will net a minimum of $2 billion but no more than $6 billion -- a surprise to some.

Yahoo's Chief Financial Officer Tim Morse acknowledged in a call with analysts this morning that though the terms may appear unusual, the fact that a minimum payment was guaranteed, "makes sense that there's a call to [a maximum] as well."

In a regulatory sleight of hand, Alibaba successfully brokered the deal by arguing that Chinese law prohibits foreign ownership of a payments company such as Alipay. "If you own 100% of the business that cannot operate, you own 100% of zero," Alibaba Chief Financial Officer Joe Tsai said on a call with analysts this morning.

The deep-seated dispute between the two companies began almost as soon as Carol Bartz took over Yahoo in 2009. After being introduced to Mr. Ma by Ms. Bartz's predecessor Jerry Yang, she immediately began to criticize Mr. Ma's management, according to an article in Forbes. Jack Ma has since been looking for ways to wrest back Yahoo's stake in Alibaba and offered to buy back its stake earlier this year, which Ms. Bartz rebuffed.

Observers suspect Ms. Bartz refused, in part, because a large portion of Yahoo's investor value comes from its significant ownership of Alibaba Group, a private company with an array of internet businesses that include e-commerce and search. Alipay, akin to PayPal, is seen as a prized asset in a country that has little consumer infrastructure. Obtaining credit cards is difficult for most citizens, and Alipay and other internet payment systems have become de facto forms of credit.

Yahoo's stock has dropped more than 20% since it announced Alipay's transfer to Jack Ma earlier this year, and its shares are down 2.5% since the agreement was announced this morning.

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