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Yahoo and Alibaba at odds over Alipay spinoff

Alibaba CEO Jack Ma

Internet giant Yahoo has been struggling to restructure its business and get back on solid financial footing in the wake of a near-disastrous takeover sideswipe from Microsoft a few years ago. One of the company’s major assets has been a 43 percent stake in China’s Alibaba Group, which included Alipay, an online payments service similar to PayPal that serves the Chinese market. Or, at least, it used to include AliPay. The Alibaba Group has spun off AliPay into an independent entity—apparently while continuing to report AliPay’s financial results with its own, and without informing its board or shareholders—like Yahoo—that the deal was going down.

Yahoo and Alibaba have two different versions of what’s happened with AliPay. According to Alibaba, a shift in the structure of AliPay was necessary in order to comply with Chinese regulations regarding foreign ownership of financial institutions operating in China, particularly in the online payments industry. Alibaba says its board met several times over the last three years, and that the Alibaba Group board—which includes Yahoo—was told in July 2009 that the majority shareholding in AliPay had been transferred to Chinese ownership.

Yahoo, however, disagrees. In a statement of its own, Yahoo says it and SoftBank were only informed about AliPay’s restructuring on March 31 of this year, and that the transactions that put the majority of AliPay into Chinese ownership “occurred without the knowledge or approval of the Alibaba Group board of directors or shareholders.” Yahoo fingers two key transactions: one in August 2010 that involved the main transfer of ownership, and another that de-consolidated AliPay in the first quarter of 2011.

Yahoo co-founder and former CEO Jerry Yang sits on the board of the Alibaba Group.

The conflict between Alibaba and Yahoo underscores the tension between Alibaba’s leader Jack Ma and Yahoo CEO Carol Bartz. Bartz has been relying on Yahoo’s stakes in Alibaba and Yahoo Japan to provide some financial stability for Yahoo itself as she works to streamline the company’s operations and re-invigorate its revenue models. However, the transfer of AliPay to a separate entity with majority Chinese ownership means one of the key jewels Bartz has been holding on to isn’t as shiny as the investment community believed—and Yahoo itself was apparently in the dark about the whole thing.

The situation could have major ramifications for Yahoo’s financial statements: Alibaba was apparently including AliPay financial results in its own consolidated financial statements even after AliPay was spun out into a separate entity; those figures, in turn, were part of Yahoo’s own financial statements. Furthermore, Yahoo has only this week informed investors of the situation for a Form 10-Q filing, raising questions about what Yahoo has been doing since it claims to have leaned about the transactions on March 31. For its part, Yahoo says only that it “continues to work closely with Alibaba and Softbank to protect economic value for all interested parties.”

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