Yahoo! (Nasdaq: YHOO) investors, get over it. Sure, Yahoo!'s major China investment, Alibaba Group, struck a less-than-ideal transaction with its formerly owned Alipay a few weeks ago, but it's time to focus attention on Yahoo!'s Act II in China.

In other words, forget about the $6 billion cap to Alibaba Group's upside potential should Alipay go public or get sold.

Rather than crying over spilt milk, it's better to look at what lies ahead for Yahoo! in China and its 43% investment stake in Alibaba Group. It's far easier to stomach than Yahoo!'s continued erosion to its core business of paid search and dismal performance in display advertising.

For long-term investors who've stuck it out mainly because of Yahoo!'s Asian investments and the significant slice it contributes to the struggling Internet company's value, it's better to keep a close eye on Alibaba Group and its prospects for an IPO -- not the group's wholly owned subsidiaries.

Taobao IPOs tabled
Last month, Alibaba Group dashed hopes of  rolling out an IPO of its wholly owned subsidiary Taobao, when it busted the e-commerce company into three separate businesses, all of which have varying degrees of maturity.

John Spelich, an Alibaba Group spokesman, says there's no plans to do an eTao IPO of the shopping search engine, or a Taobao Mall business-to-consumer IPO, or even a Taobao Marketplace consumer-to-consumer IPO, which is its most mature ecommerce business in a mature Chinese market. 

That said, however, it would be one way for Alibaba Group to maximize the investment it put into Taobao before the split. Here in the U.S., splitting large behemoths to unlock value is popular of late. Kraft Foods (NYSE: KFT) on Thursday announced that it will split its snack and grocery business in two, and earlier this year, Motorola divided its potentially fast growth yet struggling handset business into Motorola Mobility (NYSE: MMI) and slow-growth but profitable Motorola Solutions (NYSE: MSI) into two separate companies.

Open sesame
"When Jack Ma announced the Taobao companies news to employees, he did say that 'we won't rule out the possibility' of taking Alibaba Group public in the future," Spelich said of the Alibaba Group's CEO and majority owner of Alipay.

Trouble is, Ma provided no timetable or specific plans of when investors might gain access to this potential treasure trove called an IPO. Yahoo!'s board is also apparently in the dark, with one source familiar with the board's thinking saying such information has not been shared.

Investors waiting for Yahoo! to get its Alibaba Group IPO payday may turn to the Alipay agreement for guidance. Ma may want to avoid juggling two simultaneous IPOs. Alipay also has an incentive to want to have a liquidity event -- i.e., an IPO or sale -- within the next six years after the agreement closes. Otherwise, it faces additional increases and payments to Alibaba Group, according to Yahoo!'s SEC filing on the deal.

What's under the hood
The Taobao companies are the crown jewel in the Alibaba Group. Without them, investors may be less apt to want to invest in an Alibaba Group IPO.

  • Taobao Marketplace, a consumer-to-consumer auction site launched in 2003, works similar to the way eBay (Nasdaq: EBAY) operates. It also kicked eBay's butt, causing it to exit China's auction market in 2006, according to Forbes. The site currently serves more than 370 million registered users and is one of the leaders in China's mature C2C industry, says Elinor Leung, an analyst with CLSA Limited in China, in an email exchange with me.
  • Taobao Mall launched in 2008, but the business-to-consumer industry in China is still in the early stages, with an infusion of private-equity money helping to propel the industry this year, Leung says. According to first -quarter results from iResearch Consulting Group in China, Taobao Mall holds a 47.6% share of the B2C market in China.
  • eTao, a shopping search engine, is newly hatched, with its beta launching late last year. As Yahoo! turned its search development over to Microsoft (Nasdaq: MSFT), Alibaba Group officials previously told me that its relationship with Yahoo! became less strategic.

In addition to the Taobao companies, Alibaba Group has two other wholly owned subsidiaries:

  • Alibaba Cloud Computing launched two years ago, and last month it expanded into cloud-computing services for smartphones, according to a China Daily report.
  • China Yahoo!, which it acquired in 2005 as part of its $1 billion transaction with Yahoo! in exchange for a sizable stake, has been languishing and becoming less strategic since the Yahoo!-Microsoft search deal, Alibaba officials previously told me. That's because Yahoo!'s search technology was the reason Alibaba had initially entered into a transaction.

Act II
As Yahoo! investors look to the east, an Alibaba Group IPO offers a chance to benefit from the long-awaited payout from Yahoo!'s China investments -- providing that none of the Taobao companies are siphoned off under different ownership with a payment cap.

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