Yahoo just sunk its teeth even more firmly into the Chinese e-commerce giant Alibaba ahead of its planned public offering, which may come as soon as this month.. Yahoo, which owns approximately 23% of Alibaba, said in its second-quarter earnings release yesterday that it plans to sell only 140 million shares of Alibaba after the IPO, rather than the 208 million shares originally agreed in 2012.
Yahoo currently owns just under 524 million shares in Alibaba. Selling 140 million would leave Yahoo with 384 million shares, which even after the IPO and any related dilution would constitute more than 10% of the company. Analysts greeted the news happily, calling Alibaba Yahoo’s “fig leaf,” masking its otherwise weak results.
Alibaba’s 2012 agreement that Yahoo would sell 208 million shares was at the “election” of Alibaba, according to the Chinese company’s prospectus, so Yahoo’s change of plans was presumably approved by Alibaba as well. But there’s no mistaking Alibaba’s long-term expectations—it firmly intends to break up with Yahoo someday. Alibaba explains Yahoo’s “proposed staged exit” on page 78 of its latest prospectus:
We entered into the share repurchase arrangements with Yahoo to enable Yahoo to carry out a multi-stage divestiture of its holdings in our ordinary shares over time, balancing near-term liquidity with the opportunity to participate in the potential value appreciation of our company.
Yahoo may now have different ideas. On this week’s conference call with analysts (registration required) CEO Marissa Mayer gushed about Alibaba’s management, thanking founder Jack Ma and vice-chairman Joe Tsai “for having us participate through the journey that has been Alibaba as shareholders.” The relationship between the two companies “continues to get better and better,” she said. “We are very, very strong believers in Alibaba over time,” said Ken Goldman, Yahoo’s CFO.
The difference in outlook is awkward. Much of Alibaba’s listing seems designed to ensure that the company’s founding partners and top executives keep as much control as possible. The company is listing in New York because Hong Kong’s rules wouldn’t allow management to control the election of the board. Alibaba’s 27 “Lakeside Partners” essentially make all major decisions at the company, and the five-member “partnership committee” within that group controls Lakeside Partners.
Yahoo’s retention of a larger stake won’t change this equation. Right now, Yahoo has one seat on the nine-member board, which has been held by co-founder Jerry Yang for several years. In its latest prospectus Alibaba said that it might expand the board to 11 seats, further diluting Yahoo’s influence. And Alibaba expects Yang to be a docile board member. Alibaba plans to “enter into a voting agreement” that takes effect after the IPO in which Yahoo will always vote in favor of Alibaba Partnership director nominees at shareholders meetings.
The dangers of Yahoo’s role as major investor with no influence were best illustrated when Alibaba spun off its payment platform Alipay in 2011, and didn’t inform Yahoo until five weeks later. The spin-off, which analysts dubbed a “forced sale” of Yahoo’s Chinese assets, caused Yahoo’s stock to plummet when it was made public.
So why would Yahoo want to keep billions tied up in an investment in which it has almost no voice? It’s quite simple—Alibaba has been the best part of Yahoo’s earnings for years. Even though cashing out as much as it can after the IPO could land Yahoo with a welcome windfall, holding on may be what props up Yahoo’s growth for many quarters to come.