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Investors eye Yahoo!'s future as China's Alibaba files for US IPO

Is there value in the Purple Palace beyond its overseas holdings?

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Chinese e-commerce giant Alibaba filed paperwork with the US Securities and Exchange Commission on Tuesday for its much-anticipated initial public offering, a move that could have dramatic implications for Yahoo! and other US businesses.

Tuesday's SEC filing indicated that Alibaba is seeking to raise $1bn, but that's just a placeholder. The company said it valued itself at $50 per share in April, and some analysts believe its IPO could pull in as much as $18bn or more, bringing its total valuation to more than $200bn.

For Yahoo!, which currently holds a roughly 24 per cent stake in the Chinese firm, that could mean good news and bad.

In the short term, the Purple Palace will receive a welcome cash infusion. Under the terms of a share buyback agreement from last year, Yahoo! will be required to sell 208 million shares of its Alibaba holdings during the IPO. Assuming a share price of $50 each, that sale will bring in $10.4bn, though what chief exec Marissa Mayer plans to do with the funds is not known.

Over the longer term, questions linger. In particular, it remains to be seen whether Yahoo!'s recent share-price gains – the company has more than doubled its valuation since Mayer became CEO – are due to investors' estimation of Yahoo!'s own business or because they want a piece of Alibaba.

Alibaba hasn't said how many shares it plans to float in its IPO. But once it begins trading publicly, it's possible that some Yahoo! shareholders could jump ship for what they perceive as the more solid investment. In fact, some cynical analysts have already suggested that once you subtract the value of its stakes in Alibaba and independent firm Yahoo Japan, Yahoo!'s core business may be worth less than nothing.

Yahoo!'s sell-off during the IPO will reduce its stake in Alibaba by 40 per cent. Also as part of the IPO agreement, Jacqueline Reses, Yahoo!'s representative on Alibaba's board of directors, will resign, and Yahoo! will give up its right to nominate further directors, instead agreeing to vote its shares with whomever the other members nominate.

All in all, Alibaba's moves toward independence from Yahoo! could mean the honeymoon will soon be over for the Purple Palace under Mayer, who has charmed the media but has seen the company's revenues decline year-on-year for successive quarters.

But Yahoo! isn't Alibaba's only major shareholder. Japanese wireless carrier SoftBank actually owns a larger stake, and its holdings are expected to still exceed 30 per cent of the total outstanding shares following its IPO.

If SoftBank decided to sell off some of its shares, however, doing so could help it raise the capital it would need to pursue an acquisition of fourth-ranked US mobile carrier T-Mobile – something billionaire SoftBank chief Masayoshi Son has been murmuring about in recent months, having bought third-place Sprint for $21.6bn last year.

Meanwhile, the biggest winner is sure to be Alibaba itself. If its IPO can come close to raising the $18bn that analysts expect it might, it will be among the largest in US history, putting Alibaba in the company of the likes of Visa, General Motors, and Facebook.

That cash infusion will surely embolden Alibaba to expand its business into new markets – including, all but inevitably, the US, where it could one day become a whole new headache for Yahoo!, to say nothing of Amazon and potentially even Google. ®

The smart choice: opportunity from uncertainty

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