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Sunnyvale, Calif.-based Yahoo Inc. agreed Thursday to take a 40 percent interest in China’s largest e-commerce company, Alibaba.com Corp. for $1 billion in cash in what would be the largest acquisition ever in China’s fledging but fast-growing Internet market. In return, Yahoo has agreed to sell its entire China business and an exclusive right of unlimited use of its name in China to Alibaba.com for an undisclosed amount. The companies said the entire transaction is valued at more than $4 billion. Yahoo will obtain a 40 percent economic interest in Alibaba, including 35 percent of the voting rights, to become Alibaba’s largest outside shareholder, exceeded only by management and employees. The transaction would create the first Internet and e-commerce company in China by combining a conventional search engine — in which Yahoo excels but Alibaba lacks — with Alibaba’s fast-growing business-to-business and business-to-consumer e-commerce service. “The key is the convergence between search, e-commerce and auction,” said William Bao Bean, an analyst at Deutsche Bank AG. “You will see it happen much more quickly in China at a much earlier stage of development (than in the U.S.).” The combined entity would create the closest thing China has to a converged Internet business model now evolving in the U.S. It represents a leap in the development of China’s Internet market, which despite having the world’s second-largest number of Internet users is struggling with rudimentary online payment infrastructure. In a joint press conference in Beijing, Alibaba founder and chief executive Jack Ma said the merged company would operate without a single controlling shareholder, emulating Yahoo Japan’s joint venture model in which Yahoo and its shareholder Softbank Corp., each have a minority stake. Chief operating officer Daniel Rosensweig represented Yahoo at the press conference. Yahoo founder Jerry Yang would gain one seat on a four-member board consisting of Ma, Softbank president and CEO Masayoshi Son and a member representing Alibaba’s management. Son, who has said he hopes Alibaba will become China’s Yahoo, was instrumental in bringing the two companies together. Softbank, now the largest outside shareholder, will sell part of its holding in Alibaba to Yahoo. Yahoo is buying both new and old shares in Alibaba without revealing the proportion. Alibaba’s existing venture capital investors, which have pumped about $90 million into it, are likely to sell part of their holdings, a source said. Softbank said the partial sale of its holding in Alibaba unit Tao Bao.com would generate proceeds of $360 million. Alibaba first raised $5 million in seed money in 1995 from Goldman, Sachs & Co.; Boston-based Fidelity Investments Institutional Services Co. Ltd.; Venture TDFChina and Transpac Capital, both of Singapore; and Investor AB of Sweden. Softbank invested $18 million in February 2000, with existing shareholders providing $2 million. It raised another $5 million from Transpac and new investor Japan Asia Investment Co. Ltd. in February 2002. Alibaba last raised $60 million from Softbank in February 2004 when Goldman Sachs decided to sell its holding to Fidelity, Venture TDF and new investor Granite Global Ventures of Menlo Park, Calif. Analysts expect heightened foreign competition in China’s Internet market, where local companies such as Alibaba now hold the lead. The deal values Alibaba at $2.6 billion, a 38 times last year’s sales, suggesting that Yahoo is taking a big risk. But the American company hopes the market’s expected fast growth will justify its investment. Deutsche Bank’s Bean estimated China’s B-to-B e-commerce providers together would produce $363 million in revenue in 2005 and that figure will rise nearly threefold to $938 million in 2008, of which Alibaba would capture a third. Chinese auction sites, in which Tao Bao and eBay Inc.’s Eachnet compete head-on, would generate a combined revenue of $9.5 million in 2005 and $158 million in 2008, he said. John Chi of Hong Kong-based Seraphin Capital Ltd. advised Alibaba, whose counsel was a team led by Debevoise & Plimpton’s Thomas M. Britt III. “John Chi is really the main driver behind the transaction,” an Alibaba spokesman said. “Without him, the transaction would not have progressed so quickly.” Jim McVeigh of Banc of America Securities LLC served as financial adviser to Yahoo, while Kenton King of Skadden, Arps, Slate, Meagher & Flom was legal adviser. David Shabelman in San Francisco contributed to this report. Copyright �2005 TDD, LLC. All rights reserved.

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