Yahoo's conflict with Alibaba Group spells big trouble

Issues of trust and competence could further shake faith of Yahoo shareholders

It's no secret that Yahoo is fighting an uphill struggle to 1) carve out a distinctive niche for itself in a social web world and 2) regain the confidence of Wall Street.

This week's events concerning Chinese Internet company Alibaba Group, in which Yahoo holds 43 percent ownership, will make the latter goal challenging, if not impossible.

Shares of Yahoo (NASDAQ: YHOO) fell more than 7 percent on Wednesday after the company revealed in a filing with the Securities and Exchange Commission that Alibaba Group was transferring ownership of its online payment unit to an investment group headed by Alibaba founder and CEO Jack Ma.

(Also see: eMarketer: Facebook to pass Yahoo in display-ad revenue in 2011)

On Friday, shares fell another 62 cents, or 3.6 percent, to 16.55 after Yahoo claimed late Thursday that it was not told of the transfer of Alipay to Ma's group until several months after it occurred.

Alibaba Group has disputed Yahoo's assertion, saying in a statement Friday that the topic of a restructuring for Alipay to satisfy new regulatory requirements in China has been discussed among Alibaba board members for three years. Alibaba also said board members were specifically informed of the move. Among Alibaba's board members is Jerry Yang, Yahoo co-founder and former chief executive.

No matter what the truth is, it doesn't reflect well on Yahoo or inspire confidence that the company can increase shareholder value.

If Yahoo truly was unaware that Alipay's ownership -- and, presumably, revenues -- was being transferred from a company in which it has a huge stake and from which much of its own value is derived, that's a big problem. It means either Alibaba is cutting Yahoo out of the loop, or someone at Yahoo dropped the ball. (Was Yang playing Angry Birds when this was being discussed in the boardroom?)

If Yahoo did know about the Alipay change and failed to inform investors and the SEC for several months, well, that's a serious matter.

Jordan Rohan, an analyst with Stifel Nicolaus, summed it up well in a note to clients cited in this Marketwatch article:

"If Yahoo knew of this transaction yet failed to disclose it, for whatever reason, investors could lose faith in other Yahoo disclosures. If Yahoo did not know about it, trust issues loom even larger, as one could conclude that other material transactions may have occurred and were not disclosed."

One could indeed.

Then there are the bottom-line considerations. How much value does Yahoo's stake in Alibaba lose when Alipay is extracted from the equation? Whatever it is, one thing Yahoo shareholders don't need is more downward pressure on a stock that was trading above $40 a share in January 2006 but hasn't been able to get above $20 since September 2008.

On top of all that, Yahoo still hasn't been able to grow revenue for several years and is flailing about for an identity in a online world increasingly dominated by Google and Facebook.

I feel some downgrades coming, and for good reason.

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