INTERNET: Alibaba Responds To Audit, Gets New Owners

Bottom line: Alibaba’s stock is likely to come under continued pressure over the next 6 months, as it grapples with overvaluation, piracy issues and a large volume of shares coming back into the market from Yahoo.

Yahoo to spin off Alibaba stake

E-commerce giant Alibaba (NYSE: BABA) is in a couple of major headlines today, raising questions about its future ownership and also its open platform business model. On the ownership side, US Internet giant Yahoo (Nasdaq: YHOO) has announced it will spin off its large stake in Alibaba into a separate company, and then distribute shares in that new firm to existing Yahoo shareholders. On the business model side, Alibaba has enlisted one of the thousands of merchants on its popular Taobao C2C marketplace to respond to a government audit that found nearly two-thirds of goods sold on Taobao were fakes.

Alibaba’s New York-listed shares sagged under the weight of these 2 stories, dropping 1 percent in the latest session on their gradual slide from a peak of nearly $120 in November. I’ve been predicting for a while that the shares will gradually start to re-approach their IPO level of $68, as the hype slowly wears off and investors take a closer look at the company. So they could still face quite a bit of downward pressure from their current price of around $100.

Of the 2 latest news bits, the piracy one is probably the most worrisome for Alibaba since Taobao is one of its 2 biggest revenue generators, alongside its B2C e-commerce platform Tmall. C2C platforms like Taobao are notoriously difficult to police for piracy, because they are mostly populated by thousands of individuals or very small companies trying to sell their wares to online shoppers. B2C platforms like Tmall are easier to police, since their main merchants are usually large brands and retailers that are more reliable.

Taobao performed the worst among a number of major e-commerce sites audited by the State Administration For Industry And Commerce (SAIC), partly because its online marketplace is far larger than similar ones operated by rivals like (Nasdaq: JD) and Yihaodian. (previous post) Alibaba has taken the unusual approach of responding to the audit with a statement from a Taobao merchant rather than issuing its own direct response.

The merchant raises a number of issues, including the small sampling size of the audit, and questions the broader methodology and logic behind the survey. (Chinese article) I also thought the sampling size seemed quite small for such a broad survey, with just 92 batches of products tested. But I also suspect this merchant’s response was largely guided by Alibaba, which will be under pressure to take stronger action to clean up Taobao.

Next there’s the Yahoo saga, which dates back a decade ago when it bought 40 percent of Alibaba. Much has changed since then, but Yahoo still holds 384 million Alibaba shares valued at $20 billion. Yahoo has just announced that it will finally divest those shares by spinning them off into a separate company. (English article) It will then distribute shares in that company to existing Yahoo shareholders. The plan sparked a rally for Yahoo shares, which rose 7 percent in after-hours trade after the plan was announced.

I have to commend Yahoo on this plan, which will allow it to avoid paying taxes on the huge gains in the value of the Alibaba stake since it made the purchase in 2005. This divestiture will also remove a major distraction from Yahoo as its CEO Marissa Mayer works to turn around the former Internet search pioneer.

I wrote about this deal earlier this week, speculating the marriage between Alibaba and Yahoo could enter a new phase if Alibaba tried to buy back its shares and acquire Yahoo at the same time. (previous post) Such a development looks less likely now, though it’s still possible Alibaba could try to buy the new spin-off company containing its shares. Such a plan could bring in new investors hand-picked by Alibaba, removing some volatility that could result if a huge number of its publicly traded shares suddenly entered the market.

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