Photo: Wikimedia Commons
iChinaStock News) Kai-Fu Lee, former head of Google (NASDAQ: GOOG) China, today weighed in on the possibility of the Alibaba Group acquiring Yahoo (NASDAQ:YHOO).In a post on Zhihu.com, a clone of U.S. Q&A site Quora, Lee said Alibaba is not suited to manage Yahoo’s core business and the only aim for Alibaba is to buy back its own shares held by Yahoo.
As the chairman and CEO of InnovationWorks, one of China’s largest startup incubators, Lee estimates that the most plausible final deal would be for Yahoo to merge its core business with AOL after selling its Asia assets to Alibaba and PE firms.
He also said that the US regulators and politicians will not allow a Chinese company to control Yahoo.
The following is a translation of Lee’s post (links added). The original post (in Chinese) can be found here.
Alibaba is not suited to mange Yahoo’s core business. So in general, a pure Alibaba acquisition of Yahoo! will not happen. Reason:
1) While US companies face difficulties in coming to China, Chinese companies also face difficulties going to the US. (Take the example of Baidu’s entry into the Japanese market). Yahoo! faces severe set-backs to its businesses, outdated product lines, and poor positioning. Three US CEOs couldn’t change it and it is hard to find a “competent” and yet “foolish” enough new CEO to take the position. If Alibaba acquired Yahoo, a flood of Yahoo employees would quit the company and that would make it even more difficult to recruit a new CEO.
In addition, Yahoo users would also abandon the company due to the acquisition, and there would also be conflicts of company culture and pressures from both governments that no one could solve.
2) The US is extremely alert to China and the concerns of exposing private US user data to China is definitely a deal-breaker. The US Senate has investigated Yahoo in the past, when it was accused of turning over the private data of a citizen. How could they allow a Chinese-controlled Yahoo to manage the private information of US citizens?
3) Jack Ma is a smart guy and he should know that he can’t manage Yahoo right now.
In a more general way, it is more plausible that Yahoo could be split up and sold in pieces. Reasons:
1) It shows something that the Yahoo CFO became the interim CEO after Bartz was fired.
2) The accumulated value of Yahoo’s assets (stakes in Alibaba and Yahoo Japan, cash reserves and its core business) are larger than its overall market cap.
3) Even Yahoo itself admits that it is evaluating all possibilities.
4) Although its core business faces great difficulties, Yahoo is still a profitable company.
5) Alibaba is eager to reacquire a controlling stake in its own company. For that, Jack Ma would even take the risk of quarreling with Bartz and Masayoshi Son. The current mess at Yahoo provides a good opportunity for Alibaba (and that is the only reason for Alibaba to participate in a possible Yahoo deal).
However, a sell-off of Yahoo assets is not easy:
1) Almost no company would want Yahoo’s core business (Microsoft has already got what it wants from Yahoo so it has no drive to acquire the company). The only one who is interested is AOL (NASDAQ:AOL). Although AOL CEO Tim Armstrong is a good CEO, that is a risky acquisition due to the disparity in business scale of the two companies.
2) The value of Yahoo’s stake in Alibaba has been severely questioned due to the recent Alipay transfer and VIE concerns.
3) The sell-off of shares in Alibaba and Yahoo Japan would cost a great deal in taxes (probably 38%). But there may also be some ways to get around it. But it depands on who can find out a way and is willing to take the risk.
4) Considering the recent rise of Yahoo (whose shares has risen 15% more than the NASDAQ average, or $2 per share) and the problems discussed above, the price premium of Yahoo is not very much. So for a PE firm, the possible return is not very lucrative.
5) Some private equitiy group such as Silver Lake and DST have taken part in acquiring shares owned by Alibaba employees at a price that gives Alibaba a valuation of $32 billion. Those firms did not choose to buy more shares at the employees share takeover, so it is not reasonable for them to take part now and pay a higher price. Asking them to bid at a lower price is not possible either.
So according to the analysis above, Alibaba would only be interested in its own stakes held by Yahoo. And the most possible case would be:
1) Becasue everybody was talking about the possible deal, Yahoo’s share has surged significantly, making any deal unattractive. Because various parties are involved in the game with different intentions, it’s not easy to reach any agreements on price or deal.
2) As long as the deal fades out of the public eye, shares of Yahoo will drop. This time, all parties involved would learn their lessons to keep silent and reach a secret deal (which could take more than six months)
3, The possible deal should be:
A) Alibaba buys back some of its shares from Yahoo while other shares are bought by PE firms. But Yahoo’s board seats and its voting rights in Alibaba would be given back to Jack Ma, so Alibaba would get what it need to take back control.
B) PE firms find a way to avoid heavy taxation, reach an agreement on price and earn their money.
C) AOL merges with Yahoo’s core business, proving that “two turkeys can compete with an eagle.”
So the answer is, Jack Ma will participate in the final acquisition, but only to buy back the Alibaba shares. Alibaba will not takeover Yahoo or try to manage Yahoo’s core business.
By Vincent Wang, iChinaStock.com
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