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Alibaba's Fraud Scandal Constrains Yahoo's Maneuvering Room -- Again

China's largest e-commerce site, Alibaba.com (ALBCF), had a major management shake-up in the wake of an even bigger fraud investigation. Although supposedly not involved themselves, CEO David Wei and COO Elvis Lee Shi-Huei had to pack their bags after evidence of systemic problems -- more than 2,300 fraudulent storefronts on the site assisted in their efforts by 100 Alibaba salespeople, a full 2 percent of the company's workforce.

But enough about that. What about Yahoo (YHOO)?

Yahoo owns 39 percent of the e-commerce company's parent, Alibaba Group Holdings. As Dawn Kawamoto notes in DailyFinance, Asian investments represent upwards of half of Yahoo's value. That's a very different situation than when Yahoo first invested in Alibaba. Beyond the immediate hit that Yahoo's stock took, the impact of problems at its Chinese investment could be significant.

To understand the problems, first look at the structure of the closely held Alibaba Group, which owns the following:

  • Alibaba.com is public and the "flagship" for the holding company. It has multiple online trading platforms.
  • Taobao.com is privately held and claims to be China's largest online retail website, and is similar to eBay (EBAY).
  • Alipay.com is a big online payment service in China. Privately-held, it's unclear what percentage of ownership that Alibaba still has. Alipay is the Chinese version of PayPal.
  • Alibaba Cloud Computing is wholly owned by Alibaba and provides a cloud computing platform. Think of it as the computing services aspect of Amazon (AMZN).
  • China Yahoo is exactly what it sounds like: the Chinese version of Yahoo. Alibaba acquired the company, which it wholly owns, from Yahoo when the two set up their partnership in 2005.
Yahoo's main problem is its strategic muddle -- ever since its near-implosion a few years back, the company has been painfully unable to articulate what it wants to be. The company's performance has also been lackluster. Compared to Google (GOOG) or Microsoft (MSFT), it has relatively few resources to redirect its business.

Selling its Asian interests could free up some cash and give Yahoo some breathing room. There are already indicators that Yahoo might entertain selling its stake in Yahoo Japan. However, the problems with Alibaba.com put at least a temporary damper on doing the same in China.

Alibaba.com dropped $933 million in market value, or 8.6 percent, on news of the fraud. And Yahoo's stock took a hit in the wake of the scandal. Furthermore, Alibaba Group had already postponed IPO plans for Taobao and Alipay. Initial public offerings for the two would boost the value of Alibaba Holding and make Yahoo's share that much more valuable. So Yahoo CEO Carol Bartz had best find an alternative strategy quickly ... assuming one exists.

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Image: Alibaba.com
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