Yahoo's Relationship with Alibaba Goes From Bad to Worse


The awkward relationship between Yahoo and Chinese e-commerce giant Alibaba Group appears to be growing even more uneasy. The latest indication of this comes from a series of very public disclosures that Alibaba wants to buy back some of its shares from stakeholder Yahoo, but Yahoo doesn't want to sell.

Reached at his home in China late Thursday night, Alibaba spokesman John Spelich confirmed that the company tried to buy back its shares from Yahoo (YHOO), although the offer was rebuffed. Spelich said Yahoo's then made a counter-proposal, which he described as "unjustifiable." He declined to elaborate or clarify.

He Said, She Said

Yahoo, however, never issued an official, board-sanctioned counter offer. Said one person familiar with the board's thinking: "What counter offer? I'm not sure there was really ever a counter offer."

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On Wednesday, speculation ran high that Alibaba would offer up $8 billion to $11 billion to buy back its shares, before Yahoo issued a statement saying that it was not interested in selling its Alibaba stake. Wall Street soothsayers say Yahoo's Asian investments, including Alibaba, account for anywhere between 40 to 60% of the value of the Internet company.

Yahoo currently holds a 39% stake in the privately held Alibaba Group and Yahoo CEO Carol Bartz describes that relationship as strategic to Yahoo. Alibaba officials reply that the relationship is no longer strategic, as Yahoo turned to Microsoft to develop and run its search technology.

Tensions between the companies have been accelerating, with a Yahoo executive in Hong Kong commenting recently that Yahoo would like to sell advertising to China-based businesses that seek to have a presence in Hong Kong. That would put Yahoo in competition with Alibaba, which Alibaba to respond that it may have to reconsider its relationship with its major stakeholder. Earlier in the year, Alibaba chastised Yahoo for siding with Google in its censorship fight with the Chinese government.

Tensions with Bartz

Add to that tensions between Alibaba's founder Jack Ma and Yahoo's top dog Carol Bartz. According to people familiar with the situation but not authorized to discuss it, after Bartz became Yahoo CEO in January 2009, Ma and his executive team visited Yahoo. During the visit, however, they were insulted when Bartz criticized what she perceived to be Alibaba's under-performance. Then, roughly a month after that meeting, Bartz paid a visit to China and snubbed Ma & Co., making no effort to meet the team behind Yahoo's valuable investment.

Further escalating the tensions, on Wednesday Bartz told the Wall Street Journal that she "probably" will join the company's small board of four directors sometime this year, when Yahoo is eligible to have a second board seat. She would sit alongside Yahoo founder Jerry Yang, who currently holds a seat on Alibaba's board, per the agreement the companies struck back in 2005, when Yahoo transferred Yahoo China to Alibaba in exchange for a 40% stake in the company. Under the agreement, Yahoo is allowed to increase the number of its representatives on the board to two, provided investor Softbank no longer has a right to representation on the board and Yahoo still maintains an investment stake of at least 37.5%.

Needless to say, that possibility make make an uncomfortable situation for Alibaba almost unbearable.

In the meantime, however, neither Yahoo nor Alibaba were willing to say how much of Yahoo's 39% stake Alibaba had hoped to buy back.