Yahoo reaches financial terms on Alibaba

Yahoo has settled a dispute tarnishing a key investment in China, but the truce didn't bring much peace of mind to the embattled internet company's disillusioned shareholders. The complex agreement announced Friday revolves around the spin-off of an online payment service formerly owned by China's Alibaba Group, an emerging internet powerhouse partially owned by Yahoo. Alibaba spun off the payment service, Alipay, earlier this year in a move that Yahoo shareholders didn't learn about until it was disclosed in a May 10 regulatory filing in the US. Yahoo's shares have lost a quarter of their value since that bombshell, reflecting investor concerns that the spin-off had diminished the value of Yahoo's 43 per cent stake in Alibaba. The settlement will require Alipay to share nearly half its profits with Alibaba. It will culminate in Alipay writing a cheque of $2 billion to $6 billion to Alibaba if it becomes successful enough to pursue an initial public offering of stock within the next decade. A big chunk of that money eventually could flow to Yahoo and Alibaba's other major shareholder, Japan's Softbank, which also signed off on the Alipay agreement. Article continues below IPO ceiling The terms confirmed what investors had suspected all along: Yahoo won't make as much money off of its Alibaba investment as it would have if Alipay hadn't been spun off into a separate company controlled by a group led by Alibaba CEO Jack Ma. Instead of owning all of Alipay, Alibaba now owns a 37.5 per cent stake in the service. Alibaba's potential windfall from an Alipay IPO has now been capped at $6 billion, a ceiling that might look low if Alipay can realise its ambition of becoming the China's equivalent of PayPal, which has steadily risen in value since eBay bought it for $1.5 billion in 2002. The chief financial officers of Yahoo and Alibaba did their best to sell the Alipay settlement as good deal for all parties involved, but Wall Street didn't appear to be buying the rationale. After initially jumping on news of the deal, Yahoo shares slipped 40 cents, or nearly 3 per cent, to close on Friday at $13.10. "Alipay agreement: better than nothing, but not that great," JP Morgan analyst Doug Anmuth wrote in a Friday note that summed up the market's sentiment. The sour reaction keeps the pressure on Yahoo CEO Carol Bartz, whose inability to turn around the company or boost its stock after two and half years on the job has spurred talk on Wall Street that she might be replaced before her contract expires in January 2013. Yahoo has consistently indicated that Bartz has the support of the company's board, which hired her despite her lack of internet experience. Bartz, 62, also has had a rocky relationship with Alibaba's Ma, another source of worry for Yahoo shareholders. Prized asset That's because Alibaba has emerged as a prized asset while Yahoo's own revenue has been falling during Bartz's tenure. Anmuth estimates Yahoo's stake in privately held Alibaba is worth about $4.76 billion, accounting for more than one-third of Yahoo's current market value of $17 billion. Yahoo's value has shed $7 billion since the news of the Alipay spin-off. Neither Bartz nor Ma participated in Friday's conference call, raising questions about whether the tensions between the two executives are so bad that they can't even be diplomatic toward each other in a public forum.