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Yahoo Sees Blue Skies, but Clouds Brew in China
Yahoo Inc. is pressing its case to shareholders this week on why it's worth more than Microsoft Corp.'s bid for it, even as moves by its Chinese partner underscore investor doubts that Yahoo can stay independent. Alibaba Group, the Chinese Internet company that is 39% owned by Yahoo, is in advanced talks with investors to finance Alibaba's purchase of Yahoo's stake in an effort to expand its management independence should Microsoft's bid prevail, according to people close to the situation. While it's not pushing for a Yahoo sale, Alibaba believes that a change in control at Yahoo would trigger an opportunity for it to buy the stake under the companies' agreements, though that could be subject to interpretation. The talks signal Alibaba's belief that Microsoft could still succeed in its quest to buy Yahoo, which owns stakes in Internet companies in Japan, South Korea and China, where Alibaba is the third largest Internet search company. Alibaba's interest in purchasing the Yahoo stake could also represent a new wrinkle in any negotiations. For Microsoft, gaining Yahoo's Asia stakes was a key attraction when it made the bid Jan. 31, an offer now valued at about $42 billion. Alibaba's move coincided with the kickoff of Yahoo's roughly week-long road show at which company executives will meet with major shareholders to make the case that Yahoo's value exceeds Microsoft's offer, which company directors last month rejected as insufficient. Chief Executive Jerry Yang, Chief Financial Officer Blake Jorgensen and President Susan Decker are among those at the meetings, which began yesterday. As part of road-show documents filed with regulators, Yahoo reaffirmed its financial guidance for 2008 and projected strong revenue and cash-flow growth in 2009 and 2010, releasing financial projections first presented to its board in December. Based on the projections, it is easy to calculate a standalone value for Yahoo close to $40 a share, and any additional strategic value to Microsoft could make a deal worth more than that, says a person close to the situation. Microsoft's cash-and-stock offer, valued at $31 a share when first announced, has a value of about $29.49 a share based on Microsoft's price in 4 p.m. trading on the Nasdaq market yesterday. Some major Yahoo shareholders had previously said they expected Microsoft to raise its price and a deal to happen at about $ 35 a share. But it isn't clear whether Microsoft will increase its bid. The Redmond, Wash., technology company declined to comment. Analysts said Yahoo's reaffirmation of its modest guidance for the first quarter and the year means it's less likely to be vulnerable to a Microsoft takeover because it misses its projections. But they said it would be a stretch for Yahoo to hit its estimates for 2009 and 2010, which are well above current analyst expectations. "Those are not easy numbers," says Mark Mahaney, an analyst with Citi Investment Research, whose parent company has done business with Yahoo and makes a market in its shares. "We think it's the most likely outcome that Microsoft buys Yahoo, and at a higher price than $31," he adds. Imran Khan, an analyst at J.P. Morgan, estimates Yahoo's 2009 revenue at $6.4 billion after commissions paid to marketing partners are factored out. That is below Yahoo's guidance of $7.1 billion, in part because he isn't as optimistic as the company about search-related improvements. People familiar with the matter say that Yahoo's strong prospects in display advertising, such as banner ads, are central to the case the company is making to investors. Yahoo's road-show presentation doesn't include any specific mention of scenarios it has discussed with News Corp. and Time Warner Inc. about folding some of their Internet assets into Yahoo in return for significant Yahoo stakes. Such discussions about possible alternative deals -- considered long shots by people close to the situation -- haven't progressed, although as of earlier this week Yahoo and the possible partners were still talking, according to people familiar with the matter. News Corp. Chairman Rupert Murdoch said at a media conference last week that the company wouldn't get in a fight with Microsoft. ( News Corp. owns Dow Jones & Co., publisher of The Wall Street Journal.) If Microsoft's bid goes through, Alibaba aims to exercise a clause in its 2005 deal with Yahoo that exchanged Yahoo's China operation and $1 billion in cash for a stake in Alibaba. Alibaba believes the "right of first offer" clause in the agreement would be triggered by any Microsoft deal for Yahoo, say the people familiar with the matter. Under Alibaba's interpretation of the agreement, if Yahoo decides to transfer its stake in Alibaba to Microsoft as part of a broader deal, Yahoo would first have to offer that stake to other Alibaba shareholders. The Chinese company's other main shareholders include Alibaba management and Japan's Softbank Corp. Alibaba would finance the purchase of the stake with help from two lead investors and a group of others, including large Chinese institutions, the people say. Alibaba has hired Deutsche Bank and Wachtell, Lipton, Rosen & Katz as advisers, people familiar with the matter say. A Wachtell Lipton spokeswoman confirmed that the law firm has been hired as legal counsel. At the core of Alibaba's move is an effort to keep Chinese management control of Alibaba, say people familiar with the plan. Alibaba's management -- led by founder Jack Ma -- controls the company's operations despite Yahoo's stake and one board seat. Alibaba executives are concerned that Microsoft's size and history of hands-on management could jeopardize Alibaba's autonomy and its image as a Chinese company. China's government restricts Internet content and is suspicious of foreign Internet companies -- which, partly as a result, have fared worse than their domestic rivals in China. After Microsoft's bid for Yahoo surfaced, Chinese regulators contacted Alibaba about how it could be affected by a deal. Such concerns are partly driving Alibaba's search for alternative shareholders, the knowledgeable people say. Spokesmen for Alibaba and Microsoft declined to comment. Alibaba's efforts are bad news for Microsoft. While selling off Yahoo's stake would fetch a chunk of cash, the software maker would lose a foothold in an increasingly important market. Alibaba is one of China's biggest Internet companies, with a broad portfolio of businesses. Its flagship unit is Alibaba.com Ltd., a business-to-business trading platform that listed in Hong Kong in November 2007 after raising $1.7 billion in the biggest initial public offering ever by a Chinese Internet company. That unit reported on Tuesday that its profit more than quadrupled in 2007, while revenue jumped nearly 60%. Alibaba also runs Yahoo China, as well as a consumer-auction site, a payment- processing service, a software company and an advertising-trading platform. In Yahoo's road-show presentations to investors this week the company is valuing a portion of its Asian holdings at $12.6 billion, or $8.97 for each Yahoo share, based on Friday's prices. That includes Yahoo's 28% stake in Alibaba.com, which the company values at $3.2 billion, but not its stake in Alibaba Group's other, unlisted operations. Alibaba.com's share price has fallen sharply this week. But putting a value on Yahoo's entire stake could be difficult. Alibaba's nearly 80% stake in Alibaba.com, its Hong Kong-listed unit, is valued close to $ 8 billion based on its current share price. But the valuation of Alibaba's other businesses is tricky: Its Taobao unit is by far the dominant consumer auction site in China, but it is believed to have relatively little revenue because it offers most of its services free. If Microsoft acquires Yahoo, and Alibaba and Microsoft cannot agree on a price for Yahoo's stake in Alibaba, the shareholder agreement stipulates that the matter would then go to arbitration. By Kevin J. Delaney, Rebecca Blumenstein, and Robert A. Guth; Jason Dean, Jessica E. Vascellaro and Sky Canaves also contributed to this article. The Wall Street JournalMarch 19, 2008