The Alibaba Fraud Case Could Be a Weight on Yahoo


When trading resumes in the U.S. on Tuesday, Yahoo (YHOO) investors may want to brace for a potential Alibaba (ALBCF) affect. That's because the road to an initial public offering for Chinese e-commerce giant Alibaba's sister company, Taobao, may have just gotten even longer.

Yahoo, which holds roughly a 40% stake in the Chinese companies' parent, Alibaba Group Holdings, has been pining for a Taobao IPO to make its lucrative investment stake in Alibaba Group even more valuable. But on Monday, Alibaba announced that CEO David Wei and Chief Operating Officer Elvis Lee had resigned following preliminary results of a fraud investigation at the company.

Taobao CEO Jonathan Lu was named CEO of Alibaba and is now tasked with overseeing both Internet sites, a move that could potentially push back any plans for a Taobao IPO even further down the line. On Monday, John Spelich, an Alibaba spokesman reiterated: "We have no intention for Taobao to become a publicly traded company."

Up to Half of Yahoo's Value

On Jan. 26, press reports surfaced that Alibaba Group was planning to postpone IPOs of its eBay-like consumer-auction site Taobao and PayPal-like online payment site Alipay, according to a Bloomberg report. That day, Yahoo's stock fell 2.8% to $15.57 a share, while the broader markets advanced. Alibaba Group, combined with Yahoo's other Asian investments, like Yahoo Japan, account for upwards of 50% of the U.S. portal's value, say some Wall Street analysts.

Alibaba's board asked Lu to serve the dual CEO roles and has not initiated a CEO search. Lu's exposure to running publicly traded Alibaba could be a good thing if Taobao goes public one day.

Meanwhile, concerns that Lu may be stretched too thin to be effective in either role should be offset because both companies have strong leaders and a deep bench of talent, Spelich says. "Jonathan will have all the resources he needs available to him," Spelich says. Alibaba's board will monitor Lu's progress in managing both companies.

Fraudulent Storefronts

For Internet darling Alibaba, the revelations of fraud present a black mark, which it's quickly addressing. While neither Wei, Lee or other senior executives were found to be directly involved in the fraud, Alibaba says the top two executives resigned to show that they nonetheless take responsibility and that such acts won't be tolerated.

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The internal investigation revealed approximately 100 sales representatives, managers and supervisors were either intentionally or negligently allowing fraudulent storefronts to appear on its international marketplace, rather than submitting them to its authentication and verification system. Those employees accounted for roughly 2% of Alibaba's overall workforce.

Between late 2009 through 2010, a total of 2,326 Alibaba China Gold Suppliers were found to have committed fraud when selling goods to users. That represented 1.9% of the company's total Gold Suppliers over the course of two years.

Alibaba says the average claim per buyer came out to less than $1,200 and that the fraudulent actions won't have a material effect on its financial results. As for any future fallout, like loss of business, Spelich says the company hopes its actions to address the fraud will underscore its values and ethics.

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