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Sensational Merger Cannot Hide Yahoo’s China Troubles
By Liu Zongqi
8/23/2005



On August 11 Yahoo Inc. and the Chinese Alibaba Company announced their plans for a nearly US$1 billion merger. Under the terms of the agreement, Alibaba will acquire all of Yahoo China’s assets and operate under the Yahoo branch have exclusive rights to use the Yahoo brand for an indefinite duration without having to pay a penny.

Meanwhile, In other words, Yahoo Inc. is paying $1 billion to acquire a 40 percent stake in the Chinese e-commerce firm Alibaba.com. Later that day, Wall Street’s financial and economic media widely reported this striking news, mostly with headlines such as “Yahoo Pays Big Money to Acquire China's largest E-Commerce Website Alibaba.com.” Though media reported the news from both sides and different angles, the general outlook towards the merger was optimistic. In fact, those who are familiar in this area with the dealwould know that the deal signified another newcaseof a multinational company failing in China. Who Is Acquired by Whom?

As to who is acquired by whom in this sensational and widely reported deal, CEO of Alibaba, Ma Yun, holdssaid in response to a question during the press conference on the merger case “In terms of this acquisition deal, my understanding is that we acquire all of Yahoo China’s assets, but as a strategic investor, Yahoo will invest $1 billion to acquire 40 percent of Alibaba's shares and have 35 percent of the voting rights in the company. Thereby, Yahoo will become a most important strategic investor and partner of Alibaba.”

What he said actually disclosed the different views on both sides of the issue. Investors on Wall Street would rather believe that it is Yahoo that acquires Alibaba on the grounds that this sentiment can make people think that Yahoo has moved a big step forward again in expanding its share in China’s online market.

As a matter of fact, Yahoo has faced a dilemma in China. In light of Wall Street’s recent fever for investing in China’s online commerce, Yahoo took advantage of this opportunity by hastily selling ownership of its business in China. In the meantime, it employed capital market’s share-holding mechanism and announced that it is expanding its investment in China, so as to avoid the embarrassment of hasty withdrawal from China.

Because China poses an extensive and coveted market, Yahoo has kept its eye on and investments in China for a while. Therefore how could it be possible for Yahoo to ignore transfer it or to others or let others to dominate operate it? But judging from its merger with Alibaba, Yahoo Inc. has made drastic agenda-setting changes since its initial ambitious agenda. Yahoo gives Alibaba not only Yahoo China's assets including Yahoo! China, its portal website in China, search technology, instant communication and advertising business, as well as 3721.com, a Chinese language search engine, but also the exclusive rights to use the Yahoo brand for an indefinite duration.

Yahoo Inc. first established Yahoo China as early as September 1999, attempting to copy its successful worldwide search engine and set up a similar portal website in China. Nonetheless, since it first made an inroad into the Chinese market, it has never really run business with dignity. During this period of time, for its own short-term interests, it even cooperated with the Chinese Communist regime to “voluntarily” filter online messages and reveal information to the Chinese government about dissidents. Disregarding its long-term interests as well as the Chinese people’s freedom of thought and speech, Yahoo did not live up to its own reputation as a respected international search engine and portal website. It is for this reason that Internet users in China have not changed their habits of using other long-existing portal websites. As a result, Yahoo China has never become one of the popular portal websites in China.

The Story Behind the US$1 Billion Acquisition of Alibaba

Behind this merger deal, there are some pieces of information excluded from the press release. Part of the huge amount of money provided by Yahoo was used to acquire the shares from Alibaba’s shareholders. However, there are some common shareholders of both companies. It remains unclear what kind of roles these shareholders have played in the process of the acquisition deal, and would these insiders purposely raise the acquisition price per share for their own good, or make some decisions which might harm Yahoo as well as other shareholders? All these details were not included revealed in the press release or reported by Chinese and western media.

A couple of days before the deal, Baidu.com, the leading search engine in China, started to list on NASDAQ. Its share price rose 2.5 times on the first trading day, which suddenly aroused many investors’ fantasies about investing in China’s online market. It was an unusual coincidence that Yahoo all of a sudden announced that it would acquire 4035 percent of Alibaba’s shares with US$1 billion. This move not only successfully eradicated investors’ concerns about Yahoo’s poor performance in China, but also eliminated the doubts that the price of its merger with Alibaba might be too high.

To sum up, a huge sum of money Yahoo invested in China in the past six years will be allocated to Alibaba. What’s more, Yahoo even agreed to invest more money in Alibaba. As a matter of fact, it was a capital operation scheme well designed by venture capital companies and investing banks. On one hand, they did know that it is very risky to run business in China, so they invested into China under the guise of the false impression that China’s economy is booming rapidly. On the other, they exaggerated the merger deal and tried to cover up the predicaments Yahoo has encountered in the past years. Therefore, investors should really be careful, and should never forget the lessons of the Internet bubbles phenomenon that occurred several years ago.

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