Keep An Eye On MaThere’s certainly no shortage of Yahoo rumours floating around. Our viewer’s guide: pay more attention to the stories that have Alibaba Group founder Jack Ma’s name associated with them than the ones that don’t.
Yahoo’s stake in Alibaba Group is now worth $10.25 per share. If Ma is part of the group that buys Yahoo, then that stake never needs to be sold, and therefore never needs to be taxed. Most investors assume that the Alibaba Group needs to be sold by the core Yahoo business (and taxed), reducing its value to $6.50 per share. We think the opposite is more likely: Alibaba Group and its partners may purchase all of Yahoo, then sell the core Yahoo business, which is far less valuable and also has more tax basis to offset the gains from a potential sale.
Why Ma is a Buyer of Alibaba Group at $32B valuation
Alibaba Group’s crown jewel is TaoBao, which is what Third Point investor Daniel Loeb referred to as “Amazon & EBAY on steroids in terms of market share and revenue growth.”
- TaoBao Mall has a 90% market share in the consumer-to-consumer market (analogous to eBAY)
- TaoBao Marketplace, which has a 45% market share in the business-to-consumer segment (like Amazon)
- These two units processed 400 billion yuan ($62B) of transactions in 2010, and Jack Ma recently projected 1 trillion yuan (or $157B) of transactions in 2012
- That’s 3x the size of EBAY’s volume, and growing 60% y/y
- TaoBao has more registered users (370 million) than there are US citizens.
- And there is explosive growth ahead, considering only 29% of Chinese citizens currently have internet access and only 3% of Chinese citizens have access to 3G mobile networks .
The Chinese e-commerce market is a race for growth, and Taobao is way out in front of the pack.Baidu Competition & 360buy.com IPO Plan Puts Pressure on Ma
Competition between TaoBao and Baidu is heating up, because TaoBao’s e-commerce platform has a large search component, and Baidu’s search traffic has a heavy e-commerce component, which means that these two beasts are getting ready to lock horns. Jack Ma recently said, “People ask why I got involved in search engines… the reason is not to let Baidu sleep soundly.” A spokesman for Baidu responded, “Bring it on.” Those are fighting words, and this is going to be a heavyweight bout.
Ma is also feeling pressure to act because a much smaller competitor which is stockpiling enough ammunition to potentially make this a 3-horse race. That competitor is 360buy.com, which is planning to raise $4-5B in an IPO (3x the size of Google’s) in early 2012 that would be the largest Technology IPO in US history. Earlier this year, 360buy.com raised $1.5B from a group which included DST, Tiger Global and the Walton family valuing 360buy.com at $10B, which seemed aggressive considering it has almost no presence in the consumer-to-consumer segment and only about 1/3 of Taobao’s market share (or 15% of the overall market) in the business-to-consumer vertical (http://en.21cbh.com/HTML/2011-4-18/0MMjY4XzIwOTk0MA.html).
To compete at scale with Baidu and 360buy.com, TaoBao would like to bring its own IPO to market. But there’s a snag: 40% of its shares are owned by Yahoo, thanks to the brilliant $1B investment made by Yahoo founder Jerry Yang in 2005. This presents several problems for Ma: 1) Having a foreign entity own that much of a strategically valuable asset is not kosher in China; 2) Yahoo owns more of the company than he and his managers do, even though he and his team built the whole company from scratch — that’s not cool; 3) He wants to get some (or all) of those shares back before the IPO — otherwise he’ll never be able to.
Ma vs. Bartz
For these reasons, Ma approached Yahoo in December 2010 with an offer to purchase a 15% interest for $3.5B, which would have valued Alibaba Group at $23B, and which presumably included a friendly discount for the fact that Ma has built the company. Yahoo, however, said no thanks, which reportedly infuriated Ma. And that’s partly why, when Ma visited Silicon Valley in June 2010, he didn’t even see Carol Bartz. To say the two were not on speaking terms is an understatement.
To Yahoo’s credit, however, from a financial point of view, their rejection looks wise, as Alibaba Group is now repurchasing shares held by employees at a valuation of $32B, which is 39% higher than Ma’s offer in late 2010.
Ma’s Group Can Bid $4 Per Share More Than Anyone Else
So what now, with Bartz out of the picture, Yahoo hiring investment bankers, and private equity firms sniffing around?
Ma holds the key to any deal: if he’s part of the group that buys Yahoo, then the Alibaba shares themselves would never have to be sold, which means they never have to be taxed. Looking at the valuation of 360buy.com and the size of its upcoming IPO, it’s safe to say that Jack Ma would view Alibaba Group as being worth considerably more than the $32B valuation being used for the employee share repurchase. But even using just the $10.25 per share figure, tax considerations are the key to any deal. If a PE firm or Microsoft or whoever else buys Yahoo, they might look to sell the Alibaba stake and would have to pay 35-40% capital gains taxes on the sale. That turns the $10.25 per share into $6.50 per share and gives Uncle Sam a nice big bite at the apple. If Jack Ma is part of the buyout group, however, Uncle Sam gets nothing because no Alibaba shares ever need to be sold.
A Stanford Surprise?
On Friday, September 30, Jack Ma is the keynote speaker at a Stanford University event called China 2.0: Transforming Media & Commerce. We’re guessing that he might be tempted to drive a few miles down Highway 101 to try to push this thing into the end zone.
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