Yahoo Buys Into Chinese Online Company

BEIJING - Yahoo Inc. (Nasdaq:YHOO - news) is paying $1 billion in cash for a 40 percent stake in China's biggest online commerce firm, Alibaba.com, strengthening the ties that international companies are forging in the world's second-largest Internet market.

Yahoo said it will merge its China subsidiaries into Alibaba as part of Thursday's deal, the biggest in a flurry of investments by foreign Internet firms eager for access to China's soaring number of Web users, now pegged at 100 million.

"This is Yahoo getting much bigger in China," Daniel Rosensweig, Yahoo's chief operating officer, said at a news conference in Beijing with Alibaba founder Jack Ma.



Alibaba runs a Web site that matches foreign buyers with Chinese wholesale suppliers, plus the popular consumer auction site Taobao.com, which competes with the Chinese subsidiary run by eBay Inc., the world's top online auction company.

Rosensweig said the alliance creates an entity with assets to compete across the full range of Internet businesses — online commerce, e-mail and search engines. He expects China to become the world's biggest Internet market within five years.

The deal extends Sunnyvale, Calif.-based Yahoo's strategy of breaking into Asian markets by connecting with strong local partners. Yahoo and its Asian partners are now major forces in online auctions in China, Japan, Taiwan and Hong Kong, said Porter Erisman, Alibaba's vice president for international relations.

"This is really probably the knockout blow for eBay in China," he said. "This is going to make it hard for eBay to win in Asia."

EBay, which bought the Chinese auction portal Eachnet for $180 million in 2003, rejected suggestions that the Yahoo-Alibaba tie-up was a threat. EBay's share of China's auction market is 65 percent, according to Shanghai iResearch. TaoBao had 29 percent in 2004.



"It's business as usual for us," said eBay spokesman Hani Durzy in San Jose, Calif.

That sounded like careful posturing to Hoefer and Arnett analyst Martin Pyykkonen. He noted that eBay CEO Meg Whitman has predicted that China will become the company's biggest market in five years, so the Yahoo-Alibaba alliance signifies "more than just a casual threat," he said.

China is expected to be a significant profit center for eBay this year or next, but eBay needs to start capitalizing on its investments in the country in 2007 and 2008 to propel earnings growth, he said. EBay is expected to invest about $100 million in China this year, Pyykkonen estimated.

The new Yahoo-Alibaba combination will include 3721.com, a Chinese-language search engine that Yahoo acquired last year for $120 million.

That will put it in competition with China's most popular search engine, Baidu.com, whose initial stock offering in the United States last week set off a buying frenzy. Its share price soared more than 350 percent in its first day of trading before declining this week.

And the second-most popular Chinese search site is operated by a familiar rival, Google Inc. Google ramped up its China operations this week by authorizing three Chinese companies as resellers of advertisements for its China site. Google also owns 2.6 percent of Baidu.

The Chinese government says the country has 103 million people online, second only to the United States. But online commerce is still small, held back by low consumer spending in a country where urban incomes average just $1,000 a year.



Consumer-to-consumer online auctions in China totaled about $500 million last year, while business-to-consumer sales were about $1 billion, according to Joe Tsai, Alibaba's chief financial officer. He said only about 4 million people in China have used online commerce.

But Tsai said online sales are expected to grow 80 percent annually over the next three years.

With its 40 percent stake valued at $1 billion, Yahoo clearly expects huge growth from Alibaba, whose revenue was $68 million last year. Advertisers and companies pay $5,000 to $10,000 per year for membership in its commercial online auction service. It does not charge fees for individual auction listings as eBay does.

Yahoo said its investment will make it the biggest shareholder in Alibaba, which has 2,300 employees and is based in the eastern Chinese city of Hangzhou, southwest of Shanghai.

Yahoo will have 35 percent voting rights. The new entity will have a four-member board led by Ma as chairman, with a second seat held by Alibaba and the others held by Yahoo co-founder Jerry Yang and a representative of Softbank Corp., the Japanese firm that is a big Yahoo shareholder.

Pykkonnen called that a departure for Yahoo and CEO Terry Semel, because the company usually takes control of a partner's operations when it spends this kind of money. The arrangement could lead to some friction, he predicted.

"Ma has a reputation for being a bit of a cowboy," Pykkonnen said. "Terry Semel won't be able to rein him in as easily."

Alfred Tolle, head of Internet rival Lycos Inc., which recently opened an office in Shanghai and launched a social networking site in China, said he believes Yahoo overpaid for a 40 percent stake.

Tolle said he isn't interested in making an acquisition in the country, and added that the recent fascination with Chinese Internet companies reminds him of the dot-com boom in the United States a few years ago.

"It's getting a little overheated in China," he said, "a bit like 1999 or 2000."

Yahoo shares rose 75 cents, or 2.2 percent, to close at $34.94 Thursday on the Nasdaq Stock Market.