- Associated Press - Monday, May 21, 2012

SAN FRANCISCO (AP) - After years of mortifying missteps, Yahoo Inc. finally has something to boast about: a multibillion-dollar windfall from a savvy investment in China.

Yahoo is selling half of its roughly 40 percent stake in Alibaba Group Holding Ltd., one of the most successful companies in China’s rapidly growing Internet market. The $7.1 billion price ensures that Yahoo will get a hefty return from its $1 billion investment in Alibaba in 2005.

The deal, coming a week after Yahoo’s CEO abruptly resigned over misstatements in his official biography, will provide more financial firepower for the latest regime trying to turn around the long-struggling Internet company. It came after more than two years of negotiations on how Yahoo will sell the stake.

Alibaba started out in 1999 as a business-to-business website linking factories in China to buyers around the world. It grew into a company that’s larger than Yahoo, with more than 25,000 employees working at a wide range of websites and online services.

Alibaba’s portfolio includes Taobao.com, China’s version of eBay, and TMall, which brand owners can use to sell directly to consumers. Alibaba also runs a search engine for shoppers and an online payment service.

Things have been going so well at Alibaba that it now accounts for a large portion of Yahoo’s earnings.

While Yahoo has profited from the Alibaba investment, Yahoo’s stock price has plunged by more than 55 percent since the company invested in Alibaba.

Yahoo’s revenue has been steadily shrinking as rivals Google Inc. and Facebook Inc. developed more products to grab the attention of Web surfers and attract more online advertising.

Alibaba is buying back its stock from Yahoo to gain more control of its own destiny, something that CEO Jack Ma wanted, especially as Yahoo became mired in its own internal disarray in recent years.

“The transaction will establish a balanced ownership structure that enables Alibaba to take our business to the next level as a public company in the future,” Ma said in announcing the deal with Yahoo late Sunday.

The deal calls for Alibaba to raise the money needed to buy Yahoo’s stake within the next six months. Yahoo will get $6.3 billion in cash and $800 million in a new class of preferred stock in Alibaba, a privately held company.

Yahoo also will license its brand and some of its technology to Alibaba during the next four years as part of an arrangement that will include an upfront payment of $550 million.

After taxes, Yahoo estimates it will receive $4.2 billion just from the upcoming sale of half its Alibaba stake. Yahoo had been trying to work out a tax-free deal, but it wound up too complicated to pull off.

In a conference call Monday with analysts, Yahoo Chief Financial Officer Tim Morse hailed the outcome as a “home run” for Yahoo’s shareholders.

Yahoo will sell another quarter of its original investment as part of Alibaba’s initial public offering of stock, expected by the end of 2015. Yahoo will then have the option of selling its remaining holdings on the open stock market.

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