Yahoo! ( YHOO), in a bold, strategic and expected move, paid $1 billion in cash for a 40% stake in Chinese ecommerce company Alibaba, a bid to grab a piece of the fast-growing and fast-evolving Internet market in Asia. The deal puts Yahoo!, which everywhere else in the world is the leader in online media and lags only Google ( GOOG) in online search advertising, among the lead players in China's burgeoning ecommerce market, a sector it has been happy to leave to eBay ( EBAY) and others in Yahoo!'s home U.S. market. Yahoo!, which as of March 31 had $3.8 billion in cash and short-term investments, will pay for the Alibaba deal in cash. In the past, Yahoo! paid $1.7 billion for search-technology pioneer Overture in 2003 as well as $3.5 billion for Geocities and $5 billion for Broadcast.com in 1999. Those deals were paid for in Yahoo!'s own stock, making the Alibaba deal unique, if not in its size then in currency -- a wrinkle that had not been anticipated in earlier reports. But Yahoo! feels it was worth the splurge. "China is the fastest-growing Internet market in the world, and it will be the largest Internet market in the world in a couple of years," said Jerry Yang, a Yahoo! co-founder and current director who has played a leading role in the company's China strategy. "In Alibaba, we saw the chance to combine it with Yahoo! China and become the largest Internet company in China, period. "To do that in China requires a strong management team, and we found that in Alibaba," Yang said in an interview. "Alibaba offers a great management team. When you combine Yahoo!'s brains with Alibaba's, you have the only company in China that has auctions, search, communications, commerce, search and payments. And that's pretty awesome."
U.S. Internet companies have been tripping over themselves to rush into China's Internet market, which is expected to surpass the U.S. in overall users in the next few years. However, most Chinese Internet users have spent the bulk of their time on online video games first, ecommerce second and Internet searches last. That's contrary to U.S. and European behavior, in which search has dominated. Still, in the mad scramble of non-Chinese Internet companies to push into China, anything goes. So Yahoo!, which has shown a focus on Internet media (such as music, videos and financial data) as well as search, has abandoned that approach in favor of placing bets in China on a business that more closely resembles that of eBay's. And eBay may, in the long run, prove most vulnerable to this deal. Depending on the data used, Alibaba's online-auction unit Taobao.com is either about to surpass or has already surpassed eBay's own consumer-to-consumer auction operations -- eBay's CEO Meg Whitman's multiple trips to China notwithstanding. eBay vowed to spend $300 million this year, largely on China and eBay's PayPal online payment subsidiary, to shore up its future business. Alibaba also drew attention in the U.S. during eBay's vaunted seller jamboree, eBay Live, when the Chinese upstart set up a display in a nearby hotel and handed out free goodies to lure eBay sellers to its Chinese auction and online payment rivals. Yang downplayed the potential rivalry, but Alibaba CFO Joseph Tsai said Taobao.com had probably pushed past eBay in China. "In the second quarter, Taobao had $200 million of gross merchandise value," Tsai said. "We think eBay's well below $200 million in gross merchandise value in the second quarter and that we're now over 50% and we've overtaken eBay in that market." Tsai and Alibaba founder Jack Ma will be expected to fill the shoes of Zhou Hongyi, the founder of Chinese search site 3721, which Yahoo! bought in 2003. Under Yahoo!'s aegis, Hongyi quickly built his five-year-old search startup into China's second-largest search engine, after Baidu.com ( BIDU), which is minority owned by Yahoo!'s U.S. rival Google.
Hongyi, who once he joined Yahoo! vowed that his mission was to kick Google's butt in China, denied rumors earlier this year that he planned to resign to spend more time with his family. Last month, however, he did announce he would step down on Aug. 31. Yang, who applauded Hongyi's contribution to Yahoo! China, said the purchase of Alibaba had nothing to do with his resignation. Yahoo's seemingly capricious entry into China follows its mixed success in Japan. Yahoo! Japan displaced eBay as the premier online-auction site in Japan, but that joint venture has long been majority owned by Japanese venture capital firm Softbank. Softbank held a significant but undisclosed stake in Alibaba, but Yang said that stake would be smaller than Yahoo!'s after its $1 billion investment in the company. "We'll be the largest shareholder and Softbank will be a significant shareholder," Yang said. "Yahoo! will be the biggest shareholder, and Yahoo! and Alibaba will work with each other, but this is a company built and led by Mr. Ma."