Will Alibaba Sale Keep Yahoo in the Game?

Yahoo’s (NASDAQ:YHOO) directors approved a deal on Sunday to sell approximately half of its 40 percent stake in Alibaba Group back to the Chinese Internet company. The transaction put an end to years of efforts by the two to reach an agreement.

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Under the deal, Alibaba will purchase the stake that is valued at around $7.1 billion. Yahoo has agreed to divest another 10 percent of Alibaba when it files for an initial public offering in the next few years. The Internet pioneer expects to sell its remaining stake at a later date.

The troubled Internet media company intends to use the proceeds to increase shareholder value, mainly by purchasing back a large number of shares. In effect, this would shore up Yahoo’s sagging stock price.

Yahoo is trying to improve on slow growth in advertising revenue, which has been lacking over the past few years. In most recent news about the company, Yahoo’s Chief Executive Office Scott Thompson was removed from office after a shareholder revealed that Thompson had padded his resume. This is the third CEO that the company has churned out over the past three years.

Currently, the deal is valued at $7.1 billion because of Alibaba’s valuation of $35 billion. The figure could rise as the Chinese company — financing the transaction through a combination of debt and equity — raises the money at a higher valuation.

The relationship between Yahoo and Alibaba has been tense as the two companies have attempted to reach an agreement for years. However, according to Ross Levinsohn, Yahoo’s interim chief executive, the agreement reached between the two companies provides clarity for Yahoo shareholders on a substantial component of Yahoo’s value.

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