NEW YORK (TheStreet) - Alibaba's prospective initial public offering could be a bonanza for Yahoo! (YHOO), an over 22% investor in the Chinese e-commerce giant. However, the offering could also hit Yahoo!'s top-line revenue, which fell 1% in 2013 when excluding traffic acquisition costs.
The revenue hit, something that hasn't been discussed much as Yahoo! investors handicap the company's ultimate Alibaba payout, will become evident after the IPO is complete.
When Yahoo first invested in Alibaba in 2005, both companies entered a technology and intellectual property license agreement, known as TIPLA, which stipulated Alibaba would pay Yahoo a percentage of its total revenue.
Between 2006 and 2012, Yahoo received a 2% royalty equivalent to 2% of Alibaba's consolidated revenues less some costs. The TIPLA was amended at the end of 2012 so that Alibaba paid Yahoo! a $550 million lump sum and reduced its annual royalty to just 1.5% of consolidated revenue.
Under the TILPA, Yahoo received $95 million and $93 million in royalty fees from Alibaba in 2012 and 2013, or about 4% of the company's overall revenue for those years. Yahoo!'s annual 10-k filing with the Securities and Exchange Commission indicates the company booked in excess of $100 million in TILPA-related fees last year.
Those fees, however, will vanish from Yahoo! earnings just as the company receives a payout for any Alibaba shares the company sells in the IPO. Upon completion of Alibaba's IPO, the company will no longer be required to pay Yahoo! TILPA-related fees. "No royalties will be payable thereafter," Alibaba states in its IPO prospectus.