With Alibaba IPO, Yahoo Reaps A Big Reward From Risky Bet : All Tech Considered Yahoo co-founder Jerry Yang made a smart move when his company invested in a Chinese e-commerce firm called Alibaba in 2005. With this week's Alibaba IPO, Yahoo will gain nearly $8 billion.

With Alibaba IPO, Yahoo Reaps A Big Reward From Risky Bet

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This is WEEKEND EDITION from NPR News. I'm Scott Simon. Alibaba, the Chinese e-commerce company, made history yesterday with the largest U.S. IPO ever. Shares climbed 38 percent on the first day of trading. Now, one company is riding nicely along with Alibaba - Yahoo. A decade ago, Yahoo quietly made a billion-dollar bet on Alibaba. And that wager's turned into a windfall of at least $8 billion. One of the best moves in Yahoo's up-and-down history. NPR's Aarti Shahani has the story.

AARTI SHAHANI, BYLINE: It was August 2005 - August 11 to be exact. And to those who are watching, Yahoo's move didn't seem so masterful.

WARREN MCFARLAN: At that moment, when you first looked at it, it was, wow, I wonder if Yahoo knows what it's doing.

SHAHANI: F. Warren McFarlan is a professor at the Harvard Business School.

MCFARLAN: And the answer is, they knew partly what they were doing, and there were other pieces of it that they just didn't understand.

SHAHANI: McFarlan, who has written about Chinese tech companies for decades, found it curious when the founder of Yahoo - a fellow American named Jerry Yang - came to town. Yang was in search of a native Chinese company to help Yahoo build its web searching business there; someone to deliver contacts and customers and deal with the government. Yang was not betting on the success of that native company when he handed over a check for $1 billion.

MCFARLAN: It wasn't so clear how he was going to get the return out of it.

SHAHANI: Internet companies are, in essence, information companies. And McFarlan says the Chinese government was heavy-handed about controlling information. So it wasn't clear that startups could prosper. But he doesn't want to overstate how much attention the deal got.

MCFARLAN: In the big picture around the world, it was a much more of a yawn.

SHAHANI: Or a subplot. The much bigger story was another American giant - eBay - trying to stomp out Alibaba, the scrappy Chinese startup. Many assumed it would be an easy knockout for eBay. But it wasn't. And Yahoo became a pawn in that fight as business reporters, like CNBC's Maria Bartiromo, told the story.


MARIA BARTIROMO: Ebay, obviously, has been trying to really build and be a successful company in China. I guess with the Yahoo backing, this is really representing a big challenge for eBay in China.

SHAHANI: Alibaba did win - decisively snagging millions of Chinese consumers into its online auction site. And now Yahoo gets to cash in. The company based in Sunnyvale, California, is selling about one quarter of its shares and getting billions of dollars back in return. Yahoo wouldn't tell NPR exactly how it plans to spend all that money, whether it'll give it out in payments to investors or buy many more startups. But for Colin Gillis, an analyst with BGC Partners, one thing is clear.

COLIN GILLIS: It's not their hard work that generated this return. It's Alibaba's success that generated this return.

SHAHANI: There also may be a downside for Yahoo. For years, U.S. investors couldn't buy a single share of Alibaba directly, so they had to invest in Yahoo as a proxy. Now with Alibaba on the New York Stock Exchange, investors could dump their Yahoo stock. Gillis sums up the question on Wall Street.

GILLIS: Why would I want to buy the proxy now that I can buy the real thing?

SHAHANI: No matter how you size up the long-term prospects, Yahoo right now gets a lot of cash on hand. While Silicon Valley companies - from Google to Microsoft to Cisco - have a long history of investing in other startups, the sheer size of the payoff from Yahoo's bet is unique. As Cisco chief strategy officer, Padma Warrior, puts it...

PADMASREE WARRIOR: It is not common that every investment, you know, goes in the tens of billions of dollars.

SHAHANI: Her company and others are crisscrossing the world in search of their Alibabas. And Warrior says in the last decade, the conventional wisdom about why you invest abroad has changed.

WARRIOR: It's no longer the case that you can double up a product for U.S. or Europe and then take features of it and, you know, innovate them - the product - to take into an emerging market. I think that's turned out to be a myth.

SHAHANI: The new wisdom, and certainly a lesson gleaned from Yahoo's foray into China, is that native companies know what their people want and how to deliver it. And Silicon Valley can tag along for the ride. Aarti Shahani, NPR News, San Francisco.

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