U.S. Markets closed

Yahoo! vs Alibaba: The Perils of Doing Business in China

Fin - Daily Ticker - US

The stock of Daily Ticker parent Yahoo has tumbled over the past two days, as investors have realized that Yahoo no longer owns a Chinese asset that it said it owned.

The "asset" is the Chinese online payment company Alipay, the ownership of which was transferred last summer from a Chinese company called Alibaba to another entity. Yahoo owns a major percentage of Alibaba, so Yahoo shareholders believed that Yahoo also owned Alipay.

But now it doesn't.

Just as bad, Yahoo says it found out about the Alipay transfer almost two months ago, on March 31, but did not inform its shareholders until this week in a 10-Q filing. Even worse, Alibaba claims it has been discussing transfer of the Alipay assets "over the past three years" and told its board of directors, on which Yahoo has a seat, about the plans in July 2009.

Yahoo's stock had seen a nice pop recently, as a hedge fund investor named David Einhorn promoted the stock based on the value of the company's Chinese assets. Einhorn suggested that these assets were worth as much as Yahoo's whole market value.

But with the ownership of at least some of these assets now in question, Yahoo's stock has tanked.

This episode, which has yet to be resolved (Yahoo is trying to recoup some of the lost value), highlights the risk of doing business in China, especially as a US media company. Alibaba's official explanation of the transfer is that it was required under a new Chinese law, which may be the case. But China is unabashed about putting its own interests ahead of those of international investors and partners, so it's possible the law was enacted just for this purpose.

For Yahoo, meanwhile, the episode is yet another embarrassment in long string of flops. The company's failure to stay on top of the Alibaba situation is distressing, and it may have something to do with the fraying of the relationship between Yahoo's senior management and its Chinese partners. The failure to alert shareholders to the situation immediately, moreover, may actually create a legal liability.