So much for the Yahoo! (Nasdaq: YHOO) premium.
Shares of the dot-com giant tumbled 7% yesterday, after a troubling revelation in its quarterly Securities and Exchange Commission filing.
Yahoo! has historically commanded a higher earnings multiple than faster growing market leader Google (Nasdaq: GOOG) because of its Asian investments. Yahoo!'s 43% stake in China's Alibaba Group and 35% piece of Yahoo! Japan have attracted shrewd investors. Greenlight Capital's David Einhorn recently bought in, arguing that Yahoo!'s overseas interests are worth about $8 a share.
Investors may have to think twice after this week's filing.
"To expedite obtaining an essential regulatory license, the ownership of Alibaba Group's online payment business, Alipay, was restructured so that 100 percent of its outstanding shares are held by a Chinese domestic company which is majority owned by Alibaba Group's chief executive officer," the SEC filing states. "Alibaba Group's management and its principal shareholders, Yahoo! and Softbank Corporation, are engaged in ongoing discussions regarding the terms of the restructuring and the appropriate commercial arrangements related to the online payment business."
In other words, Alibaba CEO Jack Ma is taking 100% ownership of Alipay -- a financial transaction platform with far more users than eBay's (Nasdaq: EBAY) PayPal and MercadoLibre's (Nasdaq: MELI) MercadoPago -- to avoid Chinese restrictions on foreign ownership of financial platforms.
Alipay is just a part of Alibaba Group, whose two flagship properties are the Alibaba.com B2B platform and the consumer-facing Taobao marketplace. Yahoo! and Softbank didn't just get played for suckers. They will likely wind up with even bigger stakes in what's left of Alibaba Group, be financially compensated for the move, or receive an ongoing interest in Alipay.
China's strict government can force online companies into some odd setups. Renren (Nasdaq: RENN), for example, went public last week as a Cayman Islands company where the site itself is 99% owned by the CEO's wife. Shareholders have contractual rights to the popular social networking site's economic benefits. It may seem like a flimsy situation, but it hasn't gotten in the way of the stock's $5 billion market cap.
Yesterday's drop in Yahoo! shares was an overreaction, at least until these "ongoing discussions" are completed. It may even work out in favor of Yahoo! shareholders if the end result is Alibaba Group buying out its stakeholders at a fair price. China would have far more to lose if it allowed a company to stiff outside investors than Ma stands to gain if he's allowed to steal Alipay.
Should Yahoo! cash out of its Asian investments? Share your thoughts in the comment box below.
