Internet giant Yahoo and China’s Alibaba have, in conjunction with Japan’s Softbank, reached an agreement (PDF) in their lingering dispute over the Alipay online payment service. Under the agreement, Alibaba will receive no less than $2 billion and no more than $6 million when (and if) Alipay experiences a “liquidity event” like being sold or going public. The exact amount will be 37.5 percent of Alipay’s value at the time—and, of course, with Yahoo being a 43 percent stakeholder in Alibaba, the American company will reap some of the rewards.
“This is a good outcome for Yahoo and for our shareholders, as well as all the parties to this agreement,” said Yahoo CEO Carol Bartz, in a statement. “We have an agreement that preserves the value of Taobao, provides for profit sharing at Alipay, and creates a structure to allow Alibaba Group to participate if Alipay’s value is realized in an IPO or other liquidity event.”
Although the deal doesn’t put any cash into Yahoo’s coffers today as compensation for spinning out Alipay, the deal enables Alibaba and its shareholders—including Yahoo—to benefit from Alipay’s future financial performance. If Alipay does well and decided to roll out its own IPO, Alibaba and its investors will directly benefit. Alibaba will also be licensing patents and other technology to Alipay, for which it will receive royalty income.
The resolution ends a dispute with China’s Alibaba that has weighed heavily on Yahoo investors—and hence Yahoo’s stock price—since Alibaba spun off its Alipay online payment subsidiary to a separate, Chinese-owned company controlled by Alibaba founder Jack Ma. Yahoo claimed to have been taken by surprise by the move, which the company said was never approved by the Alibaba board (on which it controls seats). Alibaba maintains that talks about the necessity of spinning out Alipay—to comply with Chinese commerce regulations—had been going on for roughly three years.
Alipay is a leading online payment service in the Chinese market, including Taobao, China’s largest online retailer. Yahoo’s 43 percent stake in the Alibaba group has, in recent times, become one of Yahoo’s most value assets as the company struggles to improve its bottom line and focus its core Internet service offerings. By spinning off Alipay, Alibaba effectively reduced the potential value of Yahoo’s stake in the company, making investors increasingly uneasy about hanging onto Yahoo—in fact, at least one major investor bolted over the impasse.