Yahoo! in Talks on Record China Investment

As reported at Forbes.com

By Russell Flannery

SHANGHAI, China -- Web media company Yahoo! is in advanced talks to purchase an approximately 35% stake in China's biggest homegrown e-commerce company for almost $1 billion, in what would be the biggest investment by a foreign company in China's Internet industry to date, sources close to the negotiations said.

Yahoo! would be gaining one of China's most coveted Internet partners.

Alibaba.com is led by Jack Ma, a onetime English teacher whose unpretentious style and quick wit have made him one of China's most revered entrepreneurs.

Alibaba operates two online business sites--Taobao.com, an online auction site, and Alibaba.com, an online trading site. Both were ranked among the world's top 40 Web sites on Sunday by Alexa, the Internet monitoring service.

The talks are nearing completion amid a stunning runup in the valuations of China's Internet companies by Western investors angling to profit from the country's economic and Internet boom.

On Friday, shares in China's biggest online search company Baidu.com more than quadrupled on their first day of Nasdaq trading, the biggest one-day rise for a U.S.-listed IPO in four years, that left the company valued at $4 billion. Baidu ranked No. 6 on Alexa's list of the world’s Top 500 Web sites on Sunday, but had revenue of only $14 million last year.

Investors buoyant about China's economic outlook last month paid roughly 30 times 2005 earnings for shares in Shanghai-based ad broadcaster Focus Media after its stock began trading on the Nasdaq. The market capitalization of the company--only in business for two years--stands at around $700 million.

The talks between Yahoo! and Alibaba are complicated because they involve three big sets of valuations--Taobao, Alibaba's other assets and Yahoo!'s assets in China.

Yahoo! last year purchased a local keyword search company named 3721 Network Software for what it said would be as much as $120 million, and the business has been a success even though its founder Zhou Hongyi recently announced plans to leave 3721 as well as his post as chief of Yahoo! China.

China’s rapid growth in Internet users, rising disposable income, low Internet penetration rate, huge population of mobile phone users and growing e-commerce have put the country front and center on the radar of most of the world's Internet companies.

Western Internet businesses that as a group have been wary of the uncertainties of China's regulatory environment have been wading deeper into the country's swampy waters. Among them, Microsoft and Google aim to expand their presence here this year.

An agreement between Yahoo! and Alibaba would be a setback for eBay, which has been expanding its investments in China's online auction business and had been seen as interested in partnering with Alibaba.

The U.S. company purchased locally owned EachNet, then China's biggest online auction site, in two stages for $180 million in 2002 and 2003. For Alibaba, a hookup with Yahoo! rather than eBay might make more sense because there is less overlap with its core online auction business. It would also bring Alibaba the chance to tap into Yahoo!'s search expertise.

In Alibaba, Yahoo! would get access to one of the country’s best local Internet teams and obtain greater reach than ever into China.

Given the high valuation Baidu earned from investors, Yahoo! may well be seen as getting a bargain, depending on the specifics of Alibaba's finances.

Alibaba was founded in 1999 and is based in scenic Hangzhou, home of China's famous West Lake and a favorite spot of Marco Polo when he made his legendary trips to the country centuries ago.

The city also ranked No. 1 on Forbes China's list of the country's best business locations last year and is located in Zhejiang, a thriving center of entrepreneurism in a country that has come a long way from its post-World War II Maoist roots.