Alibaba

Alipay (支付寶)， the payment system used on Alibaba’s (阿里巴巴) eponymous B2B website and its B2C website Taobao (淘寶網)， suddenly disappeared last month from Alibaba’s list of subsidiary properties， and showed up instead in a separate holding company controlled by Alibaba’s founder Jack Ma. The move was perhaps unsurprising to some， as the transfer happened last August， but it seems that Alibaba shareholders， who include US-based web portal Yahoo!， just heard about it this past May.

At least Yahoo! shareholders are just hearing about it now. The Alibaba Group claims that it has been in discussions with Yahoo! for the past three years， and had informed Alibaba’s board — which includes Yahoo! founder Jerry Yang — of the Alipay share transference in July 2009. However， the Yahoo! board claims that it only heard about the share transference on March 31. Yahoo! owns 43% of Alibaba’s shares， and its shareholders， who have long seen Alibaba as one of Yahoo!’s most valuable assets， are livid.

According to Oppenheimer Equity Research， the Alibaba stake accounts for approximately USD 1.7 billion of Yahoo!’s USD 24 billion valuation. Greenlight Capital， a major hedge fund， took a stake in Yahoo! only a week before the news of the transfer was announced， and cited the value of Yahoo!’s Asian assets as a major reason for their purchase.

Relations between Yahoo! and Alibaba have been noticeably frosty recently. According to technology website Techcrunch， when Jack Ma flew to Palo Alto last February to explore potential partnerships in the US， he didn’t bother to meet with Yahoo!， which is headquartered in the neighborhood. Alibaba has a standing offer to buy back Yahoo!’s shares， though after the transfer of Alipay hit the news， Ma said he was now less enthusiastic about buying back the shares.

The reason given by Alibaba for the transfer of Alipay was that it was done in response to Chinese government regulations discouraging foreign ownership of payment systems. This is an issue that Yahoo! should have been aware of.

Since the news broke， investors have sold off shares of both companies， as well as a broad swath of Chinese Internet stocks. Analysts attribute the sell-off to growing concern about the transparency of listed Chinese companies. Yahoo! dropped 10% between May 6 and May 13， Alibaba dropped 3.3% (though it is listed in Hong Kong， not the US)， Baidu (百度) dropped 6.5%， Sina (新浪) dropped 12.5%， and the honeymoon period for the recently listed Youku (優酷) has officially ended with a 15.8% selloff， which is partly due to its own problems，.

This is the second major blow to Alibaba’s reputation， and despite a brief jump at the beginning of the year， the stock has been trending downwards， with a 5% loss year to date and a nearly 20% drop between February 16 and May 13. Nevertheless it’s still an impressively profitable company with an unchallenged business model. Profits were up 37% in the first quarter of 2011， and though the company said it expected revenue growth to slow somewhat， this is hardly a bad start.

It also looks as though Alibaba would have a hard time losing this fight with Yahoo!. Chinese law seems to be firmly on the company’s side， and the legal angle makes Yahoo!’s lack of due diligence regarding its investment look even more severe than Alibaba’s. “The more Yahoo! protests that it has been snookered， the more clueless it looks，” said one investor quoted by e-newsletter All Things Digital. Though there is likely to be an ongoing behind-the-scenes battle that could hurt the share price of both companies， Yahoo! is would be hurt more deeply， and recover more slowly， if it recovers at all.

Clearly， there are issues of trust involved. Both sides trust that Alibaba can put its recent string of scandals behind it， and that regulators will continue to be friendly towards the sector. After the fallout and the ensuing PR blitz， Alibaba will still be a profitable company， with the growing e-commerce market more or less to itself. That sort of money can mend a lot of broken hearts.