Bottom line: Alibaba will closely watch the performance of the newly minted Altaba over the next 1-2 years, and could make a privatization bid with Softbank if it feels the company is undermining its own stock.
Yahoo (Nasdaq: YHOO) co-founder Jerry Yang never would have dreamed a decade ago that the ground-breaking search engine he co-founded might someday morph into a Chinese e-commerce company called Alibaba (NYSE: BABA). But that’s pretty much what has just happened, with official word from Yang’s former baby that it will change its name to Altaba following the pending sale of its core Internet business.
This particular twist has a bizarre and just slightly surreal feel to it, since Yahoo was still a global powerhouse when it invested a then eye-popping $1 billion for 40 percent of a small Chinese e-commerce company called Alibaba back in 2005. But the tables have reversed since then, and what’s left of Yahoo’s original Internet business is being sold to leading US mobile carrier Verizon (NYSE: VZ).
Meantime, Alibaba has become a Chinese juggernaut controlling more than half of the country’s booming e-commerce market. If Yahoo still held its 40 percent of the company, that stake alone would be worth nearly $100 billion. But Yahoo has gradually sold down that stake and now holds about 15 percent, which is still worth a sizable $36 billion.
All of that brings us to the present and the latest headlines, which have Yahoo formally disclosing the listed company that now bears its name will formally become known as Altaba after sale of its Internet assets to Verizon closes. (English article) No official explanation was given for how the name was derived in a stock exchange filing by Yahoo, and some Chinese are jokingly saying the name sounds like the equivalent of “father of Alibaba” in Mandarin.
But a more plausible explanation being given by unnamed sources in some western reports says the new name is a combination of the words “alternative” and “Alibaba”. The idea is that this new stock would be an alternative for tracking the value of Alibaba’s value beyond Alibaba’s own New York-listed stock.
Or course that’s a slight oversimplification, since the new company will own a few other assets besides just the 15 percent Alibaba stake. The biggest of those will be a 35 percent stake in Yahoo Japan (Tokyo: 4689), which is worth another $8 billion, and a small portfolio of patents. But since its largest assets by far are the 2 sizable stakes in publicly listed companies, it is probably fair to say one could use the new stock as an alternative for tracking Alibaba’s value.
Mouse that Roared
Much has already been written about the “mouse that roared” nature to this twist of events. I remember writing about the original Yahoo purchase back in 2005, when some were saying how the US company was overpaying for the little-known Alibaba at that time. Of course those people aren’t saying anything now, as Alibaba has emerged as one of the world’s most valuable Internet companies thanks to its savvy bet on an explosion in China’s e-commerce market.
All of that said, a more interesting question is what’s in store for this newly minted company, which won’t formally get its new name until the sale of Yahoo’s Internet business closes. I’ve previously predicted that Alibaba might try to buy back the stake, since it’s quite flush with cash and has access to billions more in credit to fund such a transaction.
But Alibaba has gone on the record saying such a deal is not in the cards, since it would subject the company to huge tax liability. But that said, Alibaba has quite a lot of cash resources at its disposal, and could certainly afford such a tax bill.
Never is a long time, and I would wager that Alibaba will closely watch what happens to the new Altaba once it begins trading under its new name and asset composition. If Alibaba doesn’t like what it sees, or feels the Altaba stock is becoming a distraction to its own stock, it might well team up with Yahoo Japan owner Softbank to try and privatize the company in the next 2-3 years. Such a move would be somewhat costly, but would simplify Alibaba and thus make it more attractive to investors over the longer term.