• by Gavin O'Malley  @mp_gavin, August 12, 2005

Following a week of rumors and speculation, Yahoo! said Thursday that it would pay $1 billion in cash for a 40 percent stake in Chinese Web auctioneer Alibaba.com. After the deal closes, Yahoo! will become the largest shareholder in the privately held company, which operates a site that matches foreign buyers with Chinese wholesale suppliers, as well as an online auction site named Taobao.com.

"Our combined assets will make us the only company that has a leading position in all the key sectors that are driving explosive Internet growth in China such as search, commerce, and communications," Terry Semel, Yahoo!'s CEO, said in a prepared statement.

Alibaba.com has an online community of more than 15 million businesses and consumers, including more than 100,000 businesses that pay between $250 and $10,000 per year for its online services, Yahoo! said.

The move was applauded by analysts as a leap forward in the world's second-largest online market, where U.S. companies like Google and eBay are rushing to establish themselves.

Merrill Lynch considered the deal a "positive move," given recent news regarding search engine Baidu's successful initial public offering, and Google's expansion in China, according to a report written by Merrill analyst Lauren Rich Fine.

In 2003, Yahoo! purchased Chinese software firm 3721, which offers services to facilitate keyword purchasing on search engines.

Standard & Poor's Equity Research reiterated a "buy" rating on Yahoo! upon the company's announcement on Thursday.

"We believe the transaction, which we expect to close by year-end, pending approvals, is a major positive for Yahoo! as it pursues growth in what we believe is one of the world's most important online markets," the research firm said in a statement.

Notably, Standard & Poor's also reiterated a "hold" rating on eBay, saying the deal between Yahoo! and Alibaba does not bode well for the online auction company with global aspirations.

eBay has made China a major priority, according to S&P Equity Research. Alibaba's Taobao consumer auction business was already more than holding its own against eBay in China, the research firm said, "and we think adding Yahoo!'s resources and assets, including its portal and stake in e-commerce venture 1pai, would only enhance its prospects."

The new partnership between Yahoo! and Alibaba will have a four-person board. Management of Alibaba.com will hold two seats, with its existing CEO Jack Ma serving as the board's chairman. Other directors will include Yahoo! founder Jerry Yang and a representative from the Japanese-owned Softbank.

Business-to-business and e-commerce in China is forecast to have compound annual growth rates of 94 percent and 83 percent, respectively, through 2007, according to Yahoo!