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How Ma's Moves at Alibaba Make Yahoo Dirt Cheap

Wednesday - 1/16/2013, 2:28pm  ET

Yahoo is heading for another day on the upside, and it's up nearly 25% since CEO Marissa Mayer took over in July.

But the best is yet to come.

Jack Ma's decision to step down as CEO of Alibaba, sometimes called China's version of, and the apparent move to take the company public, perhaps even through American exchanges, represent an unprecedented opportunity.

Yahoo shareholders were demanding for years that the company sell its stake in Alibaba, which it acquired in 2005 in exchange for $1 billion and its Chinese operations. Mayer finally went part-way toward that, selling 40% of the company's stake for $7.6 billion, which is how the stock has gotten this far, gaining over $5 billion in market cap.

But that price was fairly arbitrary. The value was created between the two parties. In a public market, that price might be quite different. Once Alibaba goes public, Yahoo will be able to cash out one-fourth of its remaining stake, selling either to Alibaba or to public shareholders. And Yahoo shareholders will have a much better idea of their holdings' value going forward, with Alibaba valued by the public market.

That's just the start, however. Ma has spent the last year “cleaning up” Alibaba, getting it taken off a list of “notorious markets,” and making his own move to an executive chairman role, meaning a CEO might be hired who is telegenic and attractive to western investors.

The company is said to be interested in offering a 10% stake in itself to the public, raising just $3-4 billion, with the company as a whole valued at $35 billion. But once that happens, other wheels begin to turn.

For one thing, Alibaba is then open to becoming a global e-commerce player, not just a Chinese site. The company's dominance with Chinese suppliers would give it a huge advantage in pricing against any competitor selling Chinese-made goods, including Amazon . Yahoo engineers can help with that, and Yahoo's continuing stake gives it an incentive to do just that. The work might even be “paid for” by having Yahoo distribute the new, mobile platforms Mayer's team has been working on, in China, giving another kick to earnings. The cash being raised by the further stock sale should help Yahoo make its cloud hosting operations more competitive with those of Google and Amazon, allowing it to sell cloud services directly to companies around the world.

After its IPO, and assuming it can build a competitive English-language platform with Yahoo's help, Alibaba can go toe-to-toe with Amazon. That's important not just in the retail space, but also in the wholesale space, because it would let small U.S. stores disintermediate current middlemen, making deals directly with Chinese sources through Alibaba – Alibaba began as a business-to-business auction market.

With Yahoo's cloud technology, Mayer's focus on mobile and a global Alibaba, you could easily be looking at owning 20% of a $100 billion company within three years, plus a far more relevant mobile and cloud technology player.

For that opportunity $20/share is dirt cheap.  

This article was originally published as How Ma's Moves at Alibaba Make Yahoo Dirt Cheapon

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