Relations between Alibaba and Yahoo have been receiving attention from the media lately. There have been a few examples of sharp words tossed around including from the marketing head of Taobao who suggested that Yahoo and its CEO Carol Bartz should focus on their own flagging prospects instead of yapping on about their stake in the Alibaba Group. Separately, CEO, David Wei compared Yahoo to an ailing grandfather.

There is, however, good reason for the tension. As part of the terms of its 2005 US$1 billion investment in Alibaba, Yahoo will soon have the right to name an additional director to the board of the Alibaba Group. The Ali Group currently has a four seat board of directors: two from Ali’s management, one from Softbank and one from Yahoo (co-founder Jerry Yang).

After the 25th of October, Carol Bartz could name herself to the Alibaba Group board. Bartz is known for her aggressive, direct management style and salty language. It is fair to say she would not be a natural fit on the Ali board.

Alibaba’s senior executives have not been shy about saying: 1) they do not want Bartz; and 2) that Yahoo delivers no strategic value to them. The two companies have been on divergent paths for some time. Yahoo’s search business (which originally attracted Alibaba) has been weakening. At the same time, Alibaba has gone from strength to strength evolving into an e-commerce giant in one of the world’s fastest growing economies.

Even with the second board seat, Yahoo will not be able to gain control of Alibaba, but Yahoo could agitate for changes in its strategic direction. For example, Yahoo could use its positions on the board to push for IPO’s Ali subsidiaries such as AliPay or Taobao. That would give Yahoo an extremely attractive partial exit and return on its original investment.

The companies were reportedly in high-level discussions in the first half of 2010 as Alibaba looked to negotiate Yahoo out of the picture, but the two sides could not agree on terms.

As 25th October approaches, the Ali Group no doubt does not relish the thought of being told what to do by the “ailing grandfather” of the first dotcom boom. Complicating matters further, it is highly unlikely that the Chinese authorities would be pleased to see a foreign company such as Yahoo gain any kind of control over the largest e-commerce platform in China. That would make government approval for an IPO of Ali Group subsidiaries challenging at best.

For that reason alone, (according the FT), Ali has turned to Jerry Yang to convince Bartz not to name another director. For Ali, this is going be an irritating, distracting board room tussle that is unlikely to be resolved quickly or cleanly.

Source:  BSG Hong Kong