Microsoft-Yahoo war may spur Alibaba buyback

By Sophie Taylor and Anupreeta Das

SHANGHAI/NEW YORK (Reuters) - Chinese Internet firm Alibaba is set to speed up plans to buy back a near 40 percent stake owned by Yahoo Inc (YHOO.O: Quote, Profile, Research), as Microsoft Corp (MSFT.O: Quote, Profile, Research) threatens to go hostile with a lower bid for Yahoo.

Alibaba, keen to calm Beijing's fears that Microsoft's planned $42 billion takeover of Yahoo would increase foreign influence over China's leading Internet firms, wants to fund a buyback of all or part of the 39 percent stake Yahoo owns, said a person familiar with the Chinese firm's plans.

Analysts said this could come from a mix of foreign and local financial investors, including Chinese pension funds or state-backed firms looking to enter the Internet sector.

"Jack's number-one thing is to maintain control," said Hany Nada, managing partner of Granite Global Ventures, an early institutional investor in Alibaba, referring to the group's Chief Executive Jack Ma.

Alibaba plans to exercise its 'right of first offer' on the stake, which is stated in a 2005 agreement with Yahoo, should the two U.S. firms reach a deal, a source told Reuters earlier.

The 'right of first offer' states that Yahoo cannot transfer its Alibaba stake without first offering it to other shareholders. Alibaba believes any change of control at Yahoo, including a deal with Microsoft, would amount to such a transfer, the source said.

LOSING OUT

Alibaba may be unwilling to rule out potential business opportunities with Microsoft, for example in advertising or online trading, that would be lost if it were to buy back its stake from Yahoo. If that were to happen, the U.S. software giant also could miss a chance to expand its foothold in the world's largest Web market by users.

"Alibaba is peripheral to the potential Microsoft/Yahoo transaction, but its decision will create an impact on Microsoft's deal because Alibaba is an important strategic presence for Yahoo in Asia, and Alibaba has global aspirations," said Duncan Clark, chairman of Beijing-based research firm BDA.

Another thorny factor is valuation.

Yahoo has so far rejected Microsoft's unsolicited takeover bid as too low, in part because Yahoo sees its Asian operations as strategically valuable.

Any offer on the stake in Alibaba -- particularly if it is broken up and sold to several investors -- will likely go through a complicated arbitration process to determine the offer's value.

Perhaps the most important factor is whether Alibaba is able to line up financial support to buy back its stake from Yahoo.

Possible candidates include Chinese pension funds, or even one of the country's state-backed telecoms companies looking to move into Internet services, said Claus Mortensen, analyst at IDC's Asia/Pacific Emerging Technologies Research.

Alibaba's other major shareholder, Japan's Softbank (9984.T: Quote, Profile, Research), which holds a 33 percent stake, is unlikely to buy Yahoo's stake as it is heavily in debt after buying Vodafone's (VOD.L: Quote, Profile, Research) Japan unit two years ago.

"There's no way we could raise funds in this environment. We bought Vodafone (Japan) just in the nick of time. We were lucky," said a Softbank contact, who declined to be identified because he was not authorized to speak on the matter.

STAYING INDEPENDENT

Beijing is often wary of what it sees as attempts by foreigners to control prominent Chinese companies.

Alibaba dominates China's business-to-business sector with a 70 percent share of a market that is expected to grow to 2,130 billion yuan ($303.6 billion) in 2009 from 1,250 billion yuan in 2007, according to the Internet Society of China.

Alibaba is expected to maintain its dominant position in the short term, said Ovum analyst Charice Wang, but over the longer term local rivals offering niche services may eat into that lead.

Beijing was stung by its exposure to a foreign firm shortly after a 2005 deal in which Yahoo merged its Chinese operations into Alibaba in exchange for the stake in Alibaba.

Along with Yahoo's operations, Alibaba also gained a role in an international human rights controversy when press freedom watchdogs and U.S. lawmakers attacked Yahoo for turning over a Chinese reporter's emails to the government, which later imprisoned him.

If the Microsoft-Yahoo deal goes through and Yahoo retains its stake, the Chinese authorities are likely to set conditions for the stake's transfer, such as limiting the number of foreigners on Alibaba's board.

RIGHT OF FIRST OFFER

Even if Alibaba manages to shore up finances to buy back its stake from Yahoo, there is a small chance its interpretation of the 'right of first offer' might be challenged by a combined Microsoft-Yahoo entity. Both U.S. companies have declined to comment on Alibaba's interpretation of the right.

But one lawyer said Alibaba's right of first offer -- which applies to both a direct and indirect transfer of Yahoo's stake -- may not apply in case of a change of ownership of Yahoo.

Alibaba's position is that if Microsoft buys Yahoo, what it gets is ownership of Yahoo's stock and not Yahoo's ownership in Alibaba, said the lawyer, who declined to be identified because his firm could advise one of the companies.

So, if Yahoo is bought, Alibaba's argument is that it amounts to an indirect transfer and triggers the right of first offer, but New York state laws govern the definition of 'indirect' in this case, said the partner at a U.S .law firm who has worked on international M&A transactions.

"Microsoft, it seems, unless there is language or other terms elsewhere, simply will step into the shoes of Yahoo in the Alibaba agreement," he said.

But Carol Glendenning, a mergers and acquisitions lawyer at Strasburger and Price LLP, said that "a sale of Yahoo stock would be an indirect transfer of the beneficial ownership that Yahoo owns in Alibaba, which falls into the definition of a transfer."

Both lawyers based their assessment on excerpts of the agreement sent to them by Reuters.

Under the 2005 agreement, which is available on the U.S. Securities and Exchange Commission Web site, Yahoo also has a pre-emptive option of refusing to sell to a list of competitors.

But the lawyers said the pre-emptive option applies only if Alibaba plans to issue new shares in case of a transaction.

China Law Could Impede Microsoft Deal for Yahoo

SAN FRANCISCO — Microsoft’s hostile-takeover attempt against Yahoo may encounter an unexpected hurdle in August after a Chinese antimonopoly law takes effect that will extend the nation’s economic influence far beyond its borders.

The law, which goes into effect on Aug. 1, is intended to strengthen an existing set of antitrust regulations the Chinese originally established in 1993. It will make China a third sphere of regulatory influence, matching the power of the European Union and the United States, according to legal specialists in this country and in China who have studied it.

Formally enacted by the National People’s Congress last year, the measure gives Chinese regulators authority to examine foreign mergers when they involve acquisitions of Chinese companies or foreign businesses investing in Chinese companies’ operations. Beijing could also consider national security issues, according to a report by the official news agency Xinhua.

The law could give China influence in Microsoft’s courtship of Yahoo because in August 2005, Yahoo, a premier search portal, invested $1 billion in Alibaba.com, China’s largest e-commerce business. The investment gave Yahoo about a 40 percent stake in the Chinese company. Alibaba officials have said they believe that a Microsoft takeover of Yahoo would set in motion a buyback provision, making it possible for them to gain independence from Microsoft.

Nathan G. Bush, an antitrust law specialist with O’Melveny & Myers in Beijing, said the law represented the ascendance of China “as another regulatory capital contending for influence with Brussels and Washington.”

“Multinational corporations will need to develop strategies for all the markets they operate in,” he added, “and China is a big market.”

Whether China would seek to review a Microsoft acquisition, and what kind of posture it might take, would be closely watched by regulators and global companies as an indication whether it will play a conciliatory or a nationalistic role on the world stage.

“I don’t think anyone has worked through the issue of where an Internet merger should be reviewed, given that it truly is a World Wide Web,” said Andrew I. Gavil, a law professor at Howard University.

There are potentially dozens of jurisdictions that could claim oversight in such a deal because of the global business interests of the two huge companies and because it could potentially transform the Internet into two megaportals, Google and Microsoft. Other parts of the world that might have an active interest in the outcome of a merger include South Korea, a vibrant Internet economy where an antitrust investigation into Microsoft was previously opened.

Executives at Microsoft and Yahoo declined to comment on the possible effect of the new Chinese law. In rejecting Microsoft’s takeover bid in January, Yahoo’s chief executive, Jerry Yang, said in a letter to employees that the offer substantially undervalued the company, in part because of the significant growth potential of the Alibaba business in China.

The issue of whether the Beijing authorities will harmonize the law with foreign antitrust laws or use it to fire a shot across the bow of global businesses was sharpened last week after an effort by Huawei Technologies to invest in 3Com collapsed in the face of national security concerns in Washington.

The Committee on Foreign Investment in the United States had examined the purchase, through which Huawei would have gained a stake in 3Com. The American company’s Tipping Point subsidiary makes Internet intrusion-detection software, a technology that the United States maintains has national security implications.

Before the attempted investment fell apart, senior Chinese officials were quoted as saying they thought that the deal did not have national security implications, and that American regulatory efforts were a cover for protectionist trade practices.

National security has played a role in other attempted deals involving Chinese companies. In 2005, the Chinese National Offshore Oil Corporation made a high bid to acquire Unocal, leading to a vote in the House of Representatives to block the deal. Soon afterward, the Chinese company, known as Cnooc, withdrew its bid and Unocal was acquired by Chevron.

In the case of the proposed Microsoft-Yahoo transaction, the Chinese have in recent years become more and more alert to the role the Internet plays in their economic and political affairs.

Last week, a vice minister in the State Council Information Office, which oversees the Internet, said there were 230 million Chinese users of the Internet. He said the Internet sector accounted for 7 percent of the country’s gross domestic product, and he expected that to rise to 15 percent in three to four years, according to a Reuters report.

The official, Cai Mingzhao, warned that foreigners should not use the Internet to interfere in Chinese internal matters, according to a report in The Guardian.

Even if the Chinese government did not try to prevent a takeover by Microsoft, a prolonged review could substantially damage the value of the business, a number of Internet industry executives said.

What’s Yahoo worth to Microsoft without Alibaba?

One of Yahoo’s best arguments for getting Microsoft to raise its offer to acquire the company–the portal’s stake in Chinese e-commerce giant Alibaba–is in jeopardy courtesy of antitrust regulations in China.

The New York Times reported Friday that a Chinese monopoly law that goes into effect in August could likely throw a roadblock in front of Microsoft’s bid for Yahoo.
According to the Times:

The law, which goes into effect on Aug. 1, is intended to strengthen an existing set of antitrust regulations the Chinese originally established in 1993. It will make China a third sphere of regulatory influence, matching the power of the European Union and the United States, according to legal specialists in this country and in China who have studied it.

If Chinese authorities raise any objections to Microsoft’s acquisition of Yahoo–and they will because hometown favorite Alibaba is against the purchase–the argument that Yahoo is worth more than $31 a share becomes laughable. In fact, you could argue that Yahoo is worth less than $31 a share. In its pitch to investors arguing that it’s worth more, Yahoo figured that Alibaba was worth $2.25 a share and had a market value of $3.2 billion.

What happens if Alibaba is removed from the equation? Given that Microsoft is already a regulator whipping boy in the EU it may not want to tussle with China too–especially if Alibaba management doesn’t want to deal with the software giant.

Bottom line: Microsoft isn’t likely to lower its price, but these China regulator concerns mean that the company isn’t about to raise its bid any time soon.

Alibaba looking to buy back Yahoo stake

SAN FRANCISCO (MarketWatch) - Alibaba Group is reportedly looking to buy back the shares owned by Yahoo Inc. in a bid maintain its independence in the event of a Microsoft Corp. takeover of the beleaguered Internet portal, according to media reports.

Such a move could have a major impact on Yahoo's valuation as the company remains the target of an acquisition bid from Microsoft according to some analysts.

Alibaba Group, the Chinese Internet giant which is 39% owned by Yahoo has been meeting with investors about possibly financing a buyback of Yahoo's ownership stake, according to reports in the Wall Street Journal and Reuters, both of which cite unnamed sources. A clause in the contract between the two companies would reportedly give Alibaba the opportunity to buy back Yahoo's stake should a change of control occur at the Internet giant.

The reported talks are taking place as Yahoo is trying to convince Wall Street that Microsoft's blockbuster bid, initially valued at $44.6 billion, is grossly undervaluing the Web portal.
Yahoo's stake in Alibaba.com, a key component of Alibaba Group, and in Yahoo Japan are thought to be major components underlying its valuation. Yahoo itself values the two investments at about $12.5 billion, or about $8.90 per share, according to an investor presentation filed with the Securities and Exchange Commission on Tuesday.

Yahoo shares were trading down 1.1% at $27.34 by midday Wednesday.
"We believe this makes the deal less attractive from Microsoft's perspective as Yahoo's strategic China assets were a significant part of its bid for Yahoo," Brian Pitz of Banc of America Securities wrote in a note to clients Wednesday.

Some say the move also appears to be a stunning vote of no confidence against Yahoo from a major partner in the increasingly important Asian market as the company struggles with an unsolicited merger offer from Microsoft.

"They're separating themselves from Yahoo probably due to the instability and to concerns that Microsoft may end up owning that stake," analyst Rob Enderle of the Enderle Group said. "They don't want that turmoil to reflect on them... You don't want the concern over Yahoo to transfer to you."

The move, he continued, also makes it harder for Yahoo to highlight its strengths in Asia because "if you are showcasing that region and have someone in that region separating from you, it's not a comfortable situation to be in."

Analyst Crawford Del Prete of International Data Corp. said Alibaba's purchase of Yahoo's stake would mean a cash infusion for the Web giant, but it "could be a signal that they are not interested in a Microsoft ownership position for Yahoo."

"Or it's a signal that they are not buying into Yahoo's future vision and the valuation expectations they have," he added.

However, analyst Steve Allen of Sierra Tech Research offered a different view, saying Alibaba's reported efforts to break free from Yahoo actually gives the Internet giant an opportunity to highlight its value as a tech giant with a global footprint. He said Yahoo could argue that Alibaba is trying to "get rid of us because the opportunity is so great they want to grab it themselves."