Alibaba, Yahoo Parting Ways?

Alibaba’s relationship with Yahoo Inc. (YHOO), which holds a 39% stake in the Chinese e-commerce company, is turning bitter and the two appear to be drifting apart. The reason: Yahoo’s growing interest in the mainland online advertising market. Alibaba says it might have to reevaluate its relationship with the U.S. company.

Yahoo bought the stake in 2005 by selling off its Yahoo China business to Alibaba and invested $1 billion in the group, which owns, China’s largest e-commerce company.

Yahoo’s Hong Kong arm, apparently, is seeking business from advertisers in the mainland, a move that has infuriated the Alibaba camp and could possibly mean the allies competing with each other in the mainland. On the face of it, the move appears to be an attempt on Yahoo’s part to boost revenues in the world’s largest Internet market where it has no direct presence. However, there are deep-rooted misgivings that are possibly shaping the developments.

Alibaba’s handling of Yahoo’s China brand has antagonized Yahoo Chief Executive Carol Bartz even as a group of Yahoo shareholders have demanded that the company reworks its strategy in China. To the U.S. search company’s chagrin, Yahoo China’s share of the Chinese Internet market has dropped significantly under Alibaba’s leadership. Parting ways, therefore, may or may not be a possibility. Whatever be the case, it remains unclear as of now.

In 2009, Alibaba’s decision to remove classified ads from Yahoo China further vexed Yahoo executives. In January this year, to its biggest shareholder’s dismay, the Jack Ma-founded Alibaba strongly criticized Yahoo’s defense of Google (GOOG) over cyber attacks and censorship issues in China, terming Yahoo’s action reckless.

Meanwhile, even as Yahoo weighs a possible go-it-all-alone option in China, Alibaba has been warming up to eBay (EBAY) and the two appear to be exploring the possibilities of a partnership. Last week, eBay’s CEO John Donahoe made a presence at Alibaba’s annual industry conference and said the two companies would work together.

Alibaba, which currently has about 2 million users in the U.S., says it is actively pursuing acquisitions as it eyes global expansion. The firm has acquired two e-commerce related companies in the last two months and says beyond China, the United States, Japan and India remain key growth areas.

We currently have a Zacks #3 Rank (short-term Hold recommendation) on Yahoo shares.

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