BEIJING (Reuters) – Yahoo Inc. will pay $1 billion in cash for 40 percent of China Internet auctioneer Alibaba.com, taking on eBay and Web search firm Baidu.com as it extends its reach in the world”s second-largest Internet market.
Under the much-anticipated deal, the largest to date for an online asset in China, Yahoo would fold its entire Chinese search and other operations into Alibaba, China”s second-largest Internet auctioneer, which runs business-to-business and consumer auction sites.
The deal values the newly merged entity at about $4 billion.
"Yahoo”s investment underscores our long-term commitment to the Chinese market," Yahoo Chief Executive Terry Semel said in a statement. "We believe the combination of Yahoo and Alibaba is the best approach for Yahoo to win in this region."
Alibaba chief executive Jack Ma also denied a report in the Chinese media that Yahoo would eventually buy all of his company.
Alibaba”s Chief Financial Officer, Joe Tsai, told Reuters his company would eventually like to become publicly traded.
"There”s always a view that in the long run we would like to see the company be a public company," he said in a phone interview.
"But in the medium term, our focus is really on building the business…and really executing."
With Internet users expected to hit 120 million by the end of this year, China is the world”s second-biggest Internet market after the United States, and Yahoo”s search operations are the country”s second-largest, after leader Baidu.com.
The deal”s structure is similar to the one for Yahoo Japan Corp., in which Yahoo holds a 33 percent stake while Japan”s Softbank Corp. holds a controlling 42 percent.
Softbank is also an investor in Alibaba, and is said to have brokered the current China deal.
The Japanese Internet communications group said it would keep 27.4 percent of Alibaba after the deal, expandable to 30.5 percent if it exercises its convertible bond rights.
"If you look at what we”ve done in Japan…, we”ve built a great asset there," Yahoo co-founder Jerry Yang told Reuters in a phone interview.
"That”s the kind of model" we would like to use in China.
Based in the eastern Chinese industrial city of Hangzhou — about two hours from Shanghai — Alibaba”s main Chinese operations include a business-to-business e-commerce site, an online auction site called TaoBao that vies with eBay and a recently launched online payment system called Alipay.
The company generated cash revenue of $68 million last year and GAAP revenue of $46 million.
Its Alibaba business-to-business marketplace handled $4.5 billion in transactions in 2004, both domestic and international, while its TaoBao online auction service handled $200 million in the second quarter of 2005.
Yahoo”s main China business consists of a search service that it got two years ago when it purchased local search site 3721.com for $120 million.
Forun Technologies analyst Qiu Changhua said the deal would give Alibaba cash to fund its operations and future expansion. Yahoo, which already has a small online auctions joint venture with Sina Corp., also gains a strong presence in the online commerce market.
"It”s a good deal for Yahoo and a good deal for Alibaba," he said. "Now, with Yahoo, Alibaba will get a lot of credibility… For Yahoo, now they have a solid foothold in China."
Softbank”s Chief Executive, Masayoshi Son, disagreed with some comments that the $4 billion valuation of the new company was too high.
"I think it”s too low," he told reporters in Tokyo.
"That”s why we”re not selling (our entire stake)… That”s a signal of our confidence that this company will grow much more."
The deal marked a new high in foreign interest in Chinese Internet firms.
Rival eBay entered China though a $180 million purchase of Shanghai-based EachNet. InterActiveCorp paid $168 million for 52 percent of Chinese online travel agent eLong
Online retailer Amazon.com purchased local player Joyo.com for $75 million, and online job search leader Monster.com bought a 40 percent stake in ChinaHR.com for $50 million.