Yahoo Inc. (Nasdaq: YHOO) is often mentioned in the same breath as Alibaba Group Holding Ltd. (NYSE: BABA).That's because of Yahoo's stake in Alibaba - it owns about 24% - initiated in 2005.
And this means a lot for YHOO as Chinese e-commerce giant Alibaba preps for the largest IPO in history.
Here's how the Yahoo-Alibaba partnership began, and what it could mean for both Yahoo and Alibaba stock going forward...
Yahoo's Stake in Alibaba: Bitter Rivals Turn into Business Partners
In 2004, Alibaba and Yahoo were rivals.
That April, Alibaba accused Yahoo! China of violating Chinese law on unfair trade practices by extracting personal data from 50,000 of its clients on its online auction platform, Taobao.com.
That proved to be a brief setback, however, as the two companies shared an interest in knocking eBay Inc. (Nasdaq: EBAY) off its pedestal. Through its takeover of EachNet.com, EBAY controlled 90% of the online auction marketplace in China.
So in August 2005, YHOO announced that it would buy a 40% stake in Alibaba for $1 billion in an attempt to eat away at EBAY's dominance, a deal which closed in October.
YHOO handed over the once-in-question Yahoo! China to Alibaba, allowing it to exit the regulatory minefield that was the Chinese Internet industry, while also providing it with exposure to rapid e-commerce growth in China.
Alibaba, on the other hand, was able to fold its search engine entities, 3721.com and yisou.com, together under the Yahoo! China banner, and more effectively challenge search engine rival Baidu.com in its quest for online dominance.
But in only a few years after this partnership began, the troubles started...
In spring 2008, the seemingly online hegemony of Google Inc. (Nasdaq: GOOG, GOOGL) prompted Microsoft Corp. (Nasdaq: MSFT) to seek out YHOO for a merger, to give both companies a fighting chance at competing with the online search behemoth.
The deal would have effectively ended the Yahoo-Alibaba partnership, because of a shareholder agreement that allowed Alibaba to buy back its shares if YHOO were acquired.
But as Alibaba readied for a buyback the deal ultimately fell through, with the two companies quarreling over the terms of the deal. Some analysts were critical of YHOO's refusal to be purchased by MSFT.
"We think Yahoo has done its shareholders a great disservice by not consummating a deal with Microsoft," Morningstar analyst Larry Witt wrote in a 2008 analyst note. "A sale to Microsoft was the best possible outcome for Yahoo shareholders."
The recession hit YHOO especially hard. It did a poor job of investing capital, according to Morningstar, and it was struggling to grow revenues in a slow economy, as well as in a marketplace where it was continually losing ground to competitors.
Suspicion arose in 2008 that because of its woes, YHOO would begin a sell-off of its assets. It looked like Alibaba, which was then valued at $9.4 billion, could provide a quick cash boost to YHOO's diminishing coffers.
YHOO, however, continued to tout the importance of its exposure to the Chinese company and held on tightly to its 40% stake. It did, however, sell a 1.14% stake, or 57.5 million shares, of Alibaba.com, the parent company's flagship website.
The partnership remained intact, until it was severely threatened by rising tensions between the two firms in 2010...
At the beginning of that year, YHOO's rival GOOG was mired in disputes with the Chinese government. It alleged that Beijing was behind a massive cyber-attack on its users, and threatened to shut down its search services in China if the government didn't stop censoring results.
While some observers saw this as an opportunity for YHOO to expand its own influence in China, the company instead stood behind GOOG, stating that, "We stand aligned with Google that these kinds of attacks are deeply disturbing and strongly believe that the violation of user privacy is something that we as Internet pioneers must all oppose," a Yahoo representative wrote in an e-mail to CNNMoney in Jan. 2010.
Alibaba fired back at its biggest stakeholder, calling its defense of GOOG "reckless."
Alibaba's Quest for a Buyback
With YHOO and Alibaba often at odds with each other, it came as no surprise that in a Sept. 2010 interview with Reuters, former YHOO Chief Executive Officer Carol Bartz said the Chinese company was "constantly" approaching YHOO about repurchasing its stake in Alibaba. YHOO wouldn't budge and continued to hold on.
And this was during a time when YHOO's struggling business model brought with it heavy takeover interest.
Among the names that were trying to purchase a stake, or buy the company outright, were AOL Inc. (NYSE: AOL), News Corp. (Nasdaq: NWSA), a number of private equity firms, and, ironically enough, Alibaba's Founder Jack Ma, who saw an opportunity after YHOO fired then-CEO Bartz for the company's troubled financial situation.
The struggles only continued in 2011. In the summer, Alibaba transferred control of one of its lucrative online payment processing companies, known as Alipay, to a private company owned by Ma. YHOO claimed it was blindsided by the move and that they were left in the dark on an Alibaba decision that would lock YHOO out of profits, despite their 40% stake.
Alibaba and YHOO ultimately settled on a deal to compensate YHOO for the loss of Aliplay, but the tensions remained, and Alibaba didn't let up on its relentless quest to shed itself of YHOO investment.
The two companies began fleshing out plans for a large buyback plan by the end of 2011, and the two laid groundwork for a comprehensive plan to reduce YHOO's large stake in Alibaba.
It was agreed that Alibaba would repurchase a part of YHOO's shares and lower the stake from 40% to 15%. But when the two companies couldn't agree on the terms of the sale, the deal unraveled in December 2011.
The two went for it again in 2012, just as Marissa Mayer was preparing to take over the reins as CEO.
YHOO agreed to sell off half its shares, to lower its stake to around 20%, after some reluctance from Mayer in Sept. 2012. Alibaba purchased 523 million of YHOO's about 1.05 billion shares in the company.
YHOO netted $6.3 billion in cash and $800 million in preference shares.
A repurchase agreement originally stipulated that in the event of an Alibaba IPO, YHOO would sell back 261.5 million shares, a number that was later shaved down to 140 million, perhaps illustrating YHOO's unwillingness to let go.
As it stands now, it seems that Alibaba is still intent on wresting its remaining shares from YHOO, though YHOO seems reluctant to shed its Alibaba stake - which has become its most valuable asset.
More on history's largest IPO: Want to know more about Alibaba? Here's a good place to start...
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