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Here's something you don't read every day: Yahoo is in the money. The search-engine-turned-media-company is set to bank billions now that its long-awaited deal to sell part of its stake in Alibaba back to the Chinese internet giant has finally closed. Alibaba announced Tuesday that it had finalized terms of the agreement under which it would buy back half of Yahoo's (YHOO) 40 percent stake in itself. By the numbers, the $7.6 billion deal looks like one of Yahoo's best business decisions of the past several years.
In a rare bit of foresight for the struggling company, Yahoo co-founder Jerry Yang secured the two-fifths stake for $1 billion in 2005. The asking price turns out to have been a serious bargain now that privately-held Alibaba is valued at $40 billion. The Chinese company founded by Jack Ma as a marketplace that matched Chinese manufacturers and suppliers with customers all over the world took control of Yahoo China as part of the arrangement. At the time, Alibaba needed the cash, and Yahoo had the money to make the investment.
Since then, the roles have reversed, and fast-growing Alibaba started to regret what it had let go of. Alibaba repeatedly tried to buy back its shares, but former Yahoo CEO Carol Bartz wouldn't give Ma what he wanted, in part because Wall Street valued Yahoo's ownership of the Chinese company so highly. But after Bartz was forced out in the fall of 2011, Alibaba finally got its way. In May 2012, soon after Ross Levinsohn became interim CEO—Yahoo's third CEO in six months—the Silicon Valley company agreed to Alibaba's terms.
Like Yahoo's original investment, the deal turns out to be a good one for both companies. Alibaba has less of Yahoo breathing down its neck. Meanwhile, after a rough year, Yahoo sorely needs the money. Yahoo walks away with $6.3 billion in cash (before taxes), $800 million in preference shares in the Alibaba Group and a one-time cash payment of $550 million for an amendment to an existing technology and intellectual property agreement between the two companies.
Under the terms of the deal, Alibaba has the right to repurchase another half of Yahoo's remaining stake if Alibaba goes public. That could lead to another cash windfall for Yahoo, which would still retain 10 percent of Alibaba under that scenario.
What will Yahoo do with the cash? It's not going back to investors, which likely means CEO Marissa Mayer will go on a shopping spree to jumpstart Yahoo with acquisitions. Maybe she should keep her eyes trained on Asia for more bargains—it's worked out well in the past.
*__Update September 18, 2011 1:45pm PDT: __*Yahoo sent out a press release confirming the deal, saying the company will walk away with $4.3 billion after taxes. Turns out Yahoo won't go on a company shopping spree – it's only keeping $646 million of that money. The other $3.65 billion, 85% of the cash from Alibaba, is going straight to Yahoo shareholders, the company says.
