Yahoo! and Alibaba Reach Deal on Alipay, But Doubts Remain

When Alibaba announced it was giving away subsidiary Alipay (a leading Chinese online payment platform) to a separate company controlled by Alibaba CEO Jack Ma, Yahoo! investors balked.

"The CEO of [Alibaba] hived-off a valuable subsidiary," wrote hedge fund manager David Einhorn in a letter, reported Reuters. Normally, the parent company either gets cash or equity for spinning off valuable assets.

Now, Yahoo!, SoftBank (another Alibaba investor), and Alibaba have reached an agreement to compensate the Alibaba entity for its spinoff of Alipay.

The following are the key points of the agreement:

- Alipay will continue to provide payment processing to Alibaba properties on preferential terms

- Alipay will pay Alibaba licensing fees for using its intellectual property and technology. The fees consists of an expense reimbursement and a 49.9 percent share of the consolidated pre-tax income of Alipay,

- In the event of an IPO or other liquidity event, Alibaba will receive $2 billion to $6 billion, depending on the equity value of Alipay.

Upon the announcement of the deal, Yahoo! still fell over two percent in a day when the NASDAQ was slightly positive (as of 2:00 p.m. EST).

Investors are still uncertain over the value Yahoo! will realize from its Alipay investment (through its partial ownership of Alibaba). Moreover, they're uneasy at the way Alibaba and Ma handled the spinoff.

For investors, one of the most important factors in their investment decisions is the alignment of management and shareholder interests. This is already an issue for parent companies because of abuses like excessive compensation. For foreign subsidiaries and investments, it's even trickier.

In Yahoo!'s case, its Chinese investments were highly attractive, yet risky, precisely because of potential conflicts of interest. When Ma made the questionable move to "hive-off" Alipay, some Western investors jumped ship.

"This wasn't what we signed up for. We exited with a modest loss," wrote Einhorn, who sold his Yahoo! stake sometime after Alibaba made the announcement.