Yahoo’s Hidden Treasures Are in Asia

Christianity and Judaism were born in the Middle-East. Buddhism and Hinduism were born in India. Today, neither Christianity, Judaism nor Buddhism dominate in the region they originate from. Google today makes more than half of its revenue from outside the US (53% in 4Q09) Could we imagine a future where Yahoo, despite its weak position on search, would have a lot more assets outside its home market? If the Price is Right, then that day was… yesterday (or way before).

I did not plan to write about Yahoo but got carried away by the post on VinaGame (“Replicating Tencent’s Model“), which made me think about how Internet giants can win overseas (instead of failing). In the light of Google’s recent trouble with its China business, it might be of interest to share those ideas.

I find both Tencent (China’s largest IM and online game company) and Alibaba (China’s largest e-commerce and payment company) being quite unique companies among Internet giants because they are (1) very pragmatic and (2) much less arrogant than their leading position could make them. Alibaba confirmed this recently.

Two weeks ago, David Wei, CEO of Alibaba.com was presenting the company at a workshop at the French Chamber of Commerce in Beijing and clearly stated that they would rather find a local partner who had control in local operations rather than going alone or with a subsidiary to expand to foreign markets (notably India). This is very uncommon practice but if you take a step back, both their merger with Alibaba in China and their JV with Softbank in Japan might be among Yahoo’s top 3 best strategic decisions of the past 10 years. In both cases, they left the control of local operations to the local partner (more or less reluctantly: willingly for Japan; after a few tough years of their local operations for China).

Those two deals represent:

1. Japan
Yahoo Inc. market cap today was 21.5 billion USD, while Yahoo Japan is worth 42.2 billion USD. Yahoo Inc. owns 34.79% of Yahoo Japan and Softbank has 40.95%. In case you wonder why: in Japan you only need 33.34% to block any board decision, so Yahoo Inc. can technically veto whatever they want.

2. China
In China, Yahoo owns 40% of Alibaba Group, which includes Alibaba.com (B2C e-commerce), Taobao (B2C and C2C e-commerce) and Alipay (payment). Alibaba.com alone is worth 11 billion USD on the HKSE. David Wei said tentatively that it might represent 20% of Alibaba Group’s value.

Update (2010.02.08): Alibaba Group owns only 74% of Alibaba.com, so Yahoo would own 29.6%. According to Alibaba.com’s IR Report, both Yahoo and Softbank, directly or indirectly through its wholly-owned subsidiaries, own more than one-third of the shares in Alibaba Group (p.52). This cross-ownership omplexifies a bit the story.

Let’s do some simple maths:

• Share in Yahoo Japan = 42.2 x 34.79% = 14.7 billion USD
• Share in Alibaba Group = 11 x 5 (if Alibaba.com is only 20% value) x 40% = 22 billion USD
• Total = 36.7 billion USD

If only counting Yahoo Japan and Alibaba.com (update: and considering Alibaba Group owns only 74% of Alibaba.com), the total is still 14.7 + 3.3 = 18 billion USD

Are Yahoo US and other international operations such liabilities that they are worth between 3.5 billion USD and MINUS 15 billion USD? I might be mistaking but if not, I might buy some Yahoo stocks.

Note: I don’t know shares in Yahoo at the time of writing and this does not constitute financial advice – ask your usual supplier for this.

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