Alibaba and Yahoo Set to Shake Things Up

A first mover in China's Internet market, but never the top tier player, Yahoo pushed $1 billion into the game this week to buy a big chunk of Alibaba, China's largest e-commerce site.

But was the hefty price, which included adjusting existing assets in China to acquire a 40 percent stake in Alibaba, a savvy move, or possible miscalculation that may end up draining company resources in the region?

Alibaba, dubbed the 'Chinese eBay', last year earned a mere $46 million in the world's second-biggest online market. That fact alone has some analysts questioning the costliness of the move, but most seem to believe it means big things for both companies.

"No question this creates a monster in the China Internet," Bill Bishop, CEO of Red Mushroom and co-founder CBS MarketWatch, said in his blog. "It will have a powerful combination of search, communications, commerce and auctions."

Alibaba operates three sites: Alibaba International, a worldwide English-language business-to-business play; Alibaba China, the local online marketplace for business-to-business dealing; and TaoBao, a free eBay-like consumer e-commerce marketplace.

"All they need is a game component and they could have a shot at becoming number one," said Bishop.

Yahoo launched a Chinese-language version in September 1999 but for the most part failed to capitalize on its brand name. In January 2004, it partnered with the Chinese portal Sina.com to create an online auction marketplace aimed at small- and medium-sized businesses and buyers and sellers in mainland China.

Although the previous forays into China didn't yield as much fruit as Yahoo initially believed they would, many analysts say the Alibaba move is spot on.

And that could spell trouble for eBay. Alibaba's Taobao consumer auction site was already more than competitive against eBay before this move.

"This deal is potentially disastrous for eBay in China," said Bishop. "Taobao was eating its lunch on a small budget; now they have the backing of Yahoo to ramp up their efforts several notches."

This week Standard & Poor's Equity Research reiterated a "hold" rating on eBay, saying the deal between Yahoo and Alibaba is a negative for the online auction company.

Global Sources Chairman and CEO Merle Hinrichs, whose company competes with Alibaba, and has a strategic agreement with eBay, disagrees with the doom and gloom assessments being tossed eBay's way.

"Well, we're probably as puzzled as many about the pricing of this transaction," he said a statement. "Yahoo... doesn't really change the competitive landscape for us."