Alibaba is Yahoo’s best investment, and its most frustrating problem. The U.S. Internet company’s 24 percent stake in China’s biggest online retailer is probably worth more than Yahoo’s entire booked assets of $16 billion. But a future initial public offering, in which Yahoo has promised to sell half its shares, may deliver much less. That’s because Alibaba holds most of the cards.
A company raising growth funds typically wants a high I.P.O. price, to raise the maximum proceeds for the sale of the fewest shares. But Alibaba is unlikely to raise new money in an I.P.O. It has plenty of cash, having recently borrowed $8 billion from banks at an interest rate of roughly 4 percent. If the only shares sold are Yahoo’s, Alibaba’s bosses could be less concerned about a high initial share price and more interested in strong stock performance thereafter.
There’s another reason to keep a lid on the price: Facebook’s experience. The social network giant priced its 2012 I.P.O. at a twelve-digit dollar valuation, and then watched its shares fall precipitously. It took over a year and a big boost from this week’s earnings report to bring the stock back within 10 percent or so of the offering price. Absolute numbers matter less than relative valuations, but the psychology counts.
Analyst estimates and market chatter of a valuation as low as $60 billion for Alibaba is already puzzling. Suppose the company can ramp up its roughly $1.4 billion of earnings last year by 50 percent this year and next. Apply Facebook’s lowest price-to-forward earnings ratio of 30 times, according to Eikon, and Alibaba should tip the scales at nearly $100 billion.
Yahoo has some influence. It has a representative on Alibaba’s board and the right to appoint an investment bank to help run any offering process. The 12 percent stake it would still own after an I.P.O. also offers some comfort - albeit locked up for a year - if Alibaba shares shoot up after their market debut.
And with no I.P.O. date set, there’s also time for compromise. Yahoo might, for example, be able to strike a deal to sell its entire stake while perhaps also sharing in future stock price gains over an agreed period. That would require tough negotiations, but Yahoo investors would probably appreciate the clean exit. After eight fractious years, Alibaba may even be prepared to pay up to get a clean break of its own.
John Foley is Reuters Breakingviews China Editor. For more independent commentary and analysis, visit breakingviews.com.
