“OPEN SESAME” Says Alibaba

By Somnath Guha - September 21, 2012 | Tickers: AMZN, EBAY, YHOO | 0 Comments

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Alibaba.com, one of China's biggest Internet companies, specializes in electronic commerce -- matching buyers and sellers around the globe with Chinese suppliers and entrepreneurs. Yahoo (NASDAQ: YHOO) invested $1 billion in Alibaba's parent company in 2005 and handed over operations of its Yahoo China web site to the company. The parent company also operates Taobao.com, China's largest auction site and a strong competitor to eBay's China operation. Alibaba was founded by Jack Ma, a former English teacher, in 1999 in the city of Hangzhou.

Yahoo has completed a long-awaited $7.6 billion deal with China's Alibaba Group, generating a windfall that could help ease the pain of Yahoo shareholders who have endured the company's shortcoming during the past few years.

The resolution of 18^th September comes four months after Yahoo Inc. and Alibaba Group Holding Ltd. outlined the details of a complex transaction that took more than two years of negotiations to strike. The deal will give Alibaba greater autonomy as it prepares to pursue an initial public offering of stock within the next three years, while rewarding Yahoo for one of the few moves that has gone right for the troubled company in the past few years. Alibaba is paying $7.1 billion in cash and stock to buy back half of Yahoo's holdings. Another $550 million is being paid to Yahoo under a revised technology and patent licensing agreement with Alibaba. After paying taxes, Yahoo estimates it will pocket about $4.3 billion to supplement the $1.9 billion in cash the company had as of June 30. After Yahoo distributes most of the proceeds to its shareholders, its recently hired CEO Marissa Mayer will still have an extra $1.3 billion to finance acquisitions or hire new talent as she tries reviving the company's revenue growth. While Alibaba has been growing, Yahoo has been shrinking. The contraction has occurred even as the advertisers that provide most of Yahoo's revenue have been spending more money on the Internet. Most of that online marketing has been flowing to Internet search leader Google Inc. and, to a lesser extent, Facebook Inc.'s popular social network.

Another big payoff looms for Yahoo when Alibaba goes public, an event expected by the end of 2015. Alibaba, which owns China's version of eBay and e-commerce sites, has the right to buy back half of Yahoo's remaining 23 percent stake before the IPO. Yahoo then could chose to sell its remaining Alibaba stock after the shares begin trading. Alibaba currently has a market value of about $40 billion, based on the prices paid for the stock that the company recently sold to raise enough money to finance the Yahoo deal. Yahoo, in contrast, has a market value of less than $20 billion.

Although Mayer is highly regarded in the Internet industry, investors still seem skeptical about whether she can find a way to pump up a stock that has been stuck below $20 for the past four years. The stock was trading around $35 when Yahoo invested in Alibaba seven years ago.

Alibaba expects to sell merchandise this year worth more than that sold by Amazon Inc and eBay combined. The company is aiming for 3 trillion yuan ($473 billion) in annual transaction value from its Taobao e-commerce units in the next 5 to 7 years. Alibaba's founder, Jack Ma, said last year that Taobao's transaction value for 2012 would reach 1 trillion yuan. The company has not said what percentage of online sales come from Taobao, but it is the gem of the Alibaba Group and its profit engine.

Amazon.com, Inc. (NASDAQ: AMZN) incorporated in 1994, serves consumers through its retail websites and focuses on selection, price, and convenience. The company’s four customer sets include consumers, sellers, enterprises and content creators. It also manufactures and sells Kindle devices. The Company offers programs, which enables sellers to sell their products on its Websites and their own branded Websites and to fulfill orders through it. It is not the seller of record in these transactions, but instead earns fixed fees, revenue share fees, per-unit activity fees, or some combination thereof. The Company serves authors and independent publishers with Kindle Direct Publishing, an online platform, which lets independent authors and publishers choose a 70% royalty option and make their books available in the Kindle Store. The company’s own publishing arm, Amazon Publishing, offers authors another outlet to publish their books. It also serves authors, musicians, filmmakers and other content creators through CreateSpace, which provides on-demand publishing and manufacturing for independent content creators, publishers, film studios and music labels. With a sales growth of 40.60% and a P/E of 318.66 the company is going steady.

eBay Inc (NASDAQ: EBAY) on the other hand enables commerce through three reportable segments: Marketplaces, Payments and GSI Commerce (GSI). These segments provide online platform, services and tools to help individuals and small, medium and large merchants globally to establish online and mobile commerce and payments. The company has more than 100 million active users transacting on its sites, millions of merchants using one or more of its platforms, and a developer community with more than 800,000 members using its APIs. For fiscal 2012, eBay expects net revenues in the range of $13.800- $14.100 billion, which is unchanged from the amounts in the Company's July 18, 2012, earnings release. However, eBay now expects GAAP earnings per diluted share in the range of $1.89-$1.94 and non-GAAP earnings per diluted share (EPS) in the range of $2.28-$2.33 for fiscal 2012. According to I/B/E/S Estimates, analysts on an average were expecting the Company to report revenue of $3.399 billion for the third quarter of 2012 and revenue of $14.002 billion for fiscal 2012. 

Both Amazon and eBay have become inclusive bazaars for almost everything you’d want to buy. You can buy ham radio gear, inkjet supplies, books, and souvenirs as well as art and computer gear. They’ve got it all, almost everything.

Because both Amazon and eBay appear to be turning into conduits for every vendor imaginable, there is no telling where this is headed. As of now, Alibaba cannot say “Close Sesame”, the market is wide open.

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