| NEW YORK/SAN FRANCISCO
NEW YORK/SAN FRANCISCO Feb 15 Yahoo Inc's
efforts to craft a complex $17 billion asset swap with
its Asian partners stumbled over how to value Taobao, the
fast-growing online retail business owned by China's Alibaba
Group, according to sources familiar with the matter.
Negotiations between Yahoo, Alibaba and Japan's Softbank
broke down on Tuesday, about two months after the
parties agreed to a basic outline for a deal that would have
returned Yahoo's stakes in those companies to their owners in
return for a clutch of unspecified assets.
The actual valuation of the deal did not come up during
recent negotiations in Hong Kong, according to one source
familiar with the matter, but several people involved in the
proceedings said the rapid growth of Taobao caused Yahoo to have
second thoughts about the valuation agreed in December when they
signed a term sheet.
The situation described by several people involved in the
discussions appeared to downplay some analysts' views that the
halt in talks was a negotiating tactic employed by one of the
parties involved in the complex transaction.
"Taobao was definitely the main problem causing talks to
break off," said one of the people familiar with the matter.
The e-commerce web site is considered one of the most
valuable businesses owned by privately-held Chinese Internet
giant Alibaba Group. Alibaba does not disclose financial details
for Taobao, but analysts say the web site dominates
consumer-to-consumer online retail in China and is growing
rapidly as the country's online population - already the world's
second-largest - swells.
"In the period we have been in discussion with them, Taobao
has performed well," said a second person close to the
situation. Taobao's rapid growth made it difficult to agree on
the business' value, he said.
While Yahoo never explicitly moved to revisit the price of
the deal, the person said, "it certainly puts pressure on
whether the deal ultimately makes sense or not."
Reports of the snag in the deal - a so-called cash-rich
split-off that would have allowed Yahoo to shed its Asian asset
in a tax-efficient way - sent Yahoo's shares down 4.7 percent on
Tuesday. Yahoo owns roughly 40 percent of Alibaba Group shares
and 35 percent of Yahoo Japan, which it jointly owns
Several sources noted that some factions within Yahoo were
always somewhat hesitant about the prospects of the
tax-efficient deal because of its inherent complexity and the
uncertainty of satisfying the Internal Revenue Service.
The risk of political fall-out over the deal, which would
effectively allow Yahoo to avoid paying billions of dollars in
taxes after spinning off its stakes in Alibaba and Softbank,
could also have contributed to the deal losing some of its
appeal, according to the first source familiar with the matter.
WHAT'S STILL ON THE TABLE?
Yahoo representatives - including Chief Financial Officer
Tim Morse - returned to the United States late on Monday after a
week of negotiations in Hong Kong, and another call was set for
this week, according to several sources.
The sources said Yahoo and its Asian partners could still
strike another, simpler and taxable, deal, but there was no
agreement yet on the price at which Yahoo should sell.
The convoluted nature of the cash-rich split-off
transaction, and the internal changes at Yahoo - including the
appointment of CEO Scott Thompson in January and a planned board
shuffle that will see the exit of Chairman Roy Bostock - further
complicated the negotiations.
"It was an extremely complicated deal to get done given the
multi-jurisdictions and the size of the assets in play," said a
third source familiar with the matter.
"Yahoo was just completely ineffective, unable to execute a
deal. It comes down to them being in turmoil with a new
president, a board change, etc," that person said.
Representatives from Yahoo and Alibaba were not available
for comment. None of the sources wanted to be identified given
the private nature of the negotiations.
Despite the complexities, both Yahoo and Alibaba have strong
incentives to work things out, according to some observers.
Alibaba founder Jack Ma has tried to buy back the 40 percent
of his company owned by Yahoo several times in recent years,
only to be rebuffed by Yahoo.
The U.S. company undertook a "strategic review" of its
business after firing CEO Carol Bartz in September, and analysts
have said Yahoo would want to monetize its Asian assets so
Thompson can focus on reviving the company's core operations.
The pressure on Thompson increased on Tuesday with activist
hedge fund ThirdPoint saying it wanted to nominate its own slate
of four directors to Yahoo's board.
Some investors reckon the latest snag in the deal could
prompt Alibaba to pair up with private equity and buy Yahoo
For now, the cash-rich split deal appears dead in the water.
"The structure isn't going to work," said the third source.
"They may still want to unload the assets. Everyone's going to
go back and regroup and look to a possible alternate path