“Porter, there’s an urgent meeting downstairs that Jack needs you to attend,” Jack’s assistant told me as we entered the summer of 2005.
“What’s it about?” I asked.
“He’ll tell you at the meeting. But all of the senior managers need to be there. You should go downstairs right away.”
At the meeting room I found the entire senior management team sitting around a table. A sudden meeting such as this could mean only one of two things—very good news or very bad news.
Jack walked in, put his hands on the table, and got straight to the point.
“I’ve got a big announcement everyone—we’re buying Yahoo! China.”
The team was surprised. Shocked, even. We hadn’t seen that coming. And if we hadn’t seen it, one thing was for sure—neither would eBay.
Jack explained how the deal had come about. “A few weeks ago I was at a conference in Pebble Beach, and I started chatting with Jerry Yang. We started talking about what we could do together in China. I told him that if he really wanted Yahoo! to win in China, he should let us run it. After talking with them for a few weeks, we agreed in principle to a deal, and now we’re finalizing it. Yahoo!’s going to invest $1 billion in Alibaba and we’re going to take over Yahoo! China.”
Yahoo! wasn’t the most obvious choice for a partner, but the more Jack explained the rationale for the deal, the more sense it made. Since becoming the first US Internet company to enter the China market in 1999, Yahoo! had struggled through a series of partnerships, none of which had worked out. But its early entrance into China had given Yahoo! an advantage—its executives had learned from their six years of mistakes. Chief among these lessons was that they could not simply apply their US model to the China market. They quickly found that translating international content for the China market didn’t satisfy the needs of local consumers, and Yahoo!’s growth had failed to keep pace with that of local rivals who had developed features and content that better fit the China market.
In 2003 Yahoo! attempted to rectify the problem by acquiring local search engine leader 3721, led by the feisty entrepreneur Zhou Hongyi. The main driver of 3721’s growth was controversial antivirus software Zhou had created that, once downloaded, also installed a search toolbar on the computers of Internet users that defaulted to the 3721 search engine. Within the industry the 3721 software was widely regarded as a “hooligan application,” since it often installed without the user’s being fully aware and was quite difficult to uninstall. Nevertheless Zhou’s aggressive tactics worked; 3721 quickly became the second-largest search engine in China, and in 2003 Yahoo! bought it, keeping Zhou on to head Yahoo! China’s business. Over time, however, a rift grew between Zhou Hongyi and Yahoo’s US management, and Yahoo! began to look for alternatives for doing business in China.
In the process Yahoo! looked to the example of Yahoo! Japan, where the company had partnered with Alibaba’s main investor, Softbank. Japan was the one market in which Yahoo! didn’t actually control its local business. Instead it owned a minority share and let Softbank run Yahoo! Japan through a licensing arrangement. Yahoo!’s decision to put a local partner in charge of Yahoo! Japan had allowed Yahoo! Japan to thrive by generating localized content that better fit Japan’s unique local conditions, leading Yahoo! Japan into a solid market leadership position.
Yahoo! Japan also had the distinction of being the only company to have beaten eBay in a major market. eBay had entered the market after Yahoo! Japan and withdrew from the Japanese market in 2002. So from Yahoo!’s perspective, striking a deal with us meant it could solve its China management problem and gain a foothold in China’s growing e-commerce space, backing a team that had a chance of beating eBay in China, just as Softbank’s Yahoo! Japan had won the auction market in Japan.
From Alibaba’s perspective the upside was not as clear. On paper eBay seemed like the more logical partner, with marketplace models that clearly complemented ours. Plugging Taobao into eBay’s global portfolio would have fit the Chinese market snugly into eBay’s global embrace, leaving only Japan out of its worldwide network. And Alibaba’s B2B businesses would have been the last piece of the puzzle, connecting the world’s manufacturers, trading companies, and wholesalers with eBay’s PowerSellers.
On the other hand, Alibaba partnering with a search engine leader would create an entirely new business model, one that combined marketplaces and a search engine under one roof. In US terms it would be like combining eBay, PayPal, Yahoo!, and Google in one entity. Partnering with Yahoo! would safeguard us against the rise of search engine advertising, which we feared would siphon ad revenue from Alibaba and Taobao as Internet users became more savvy and abandoned our platforms to create their own websites which they’d then promote on search engines. We were already losing some of our customers’ advertising dollars to Google and Baidu, the major Chinese search engine. And we knew from our meeting with the Google founders that they probably would be making an aggressive push into China soon. Why compete against search engines, Jack thought, when you can own one yourself?
The decision came down to Jack’s desire to take on the bigger challenge. Nine times out of ten, an entrepreneur would have gone with eBay, just as Eachnet’s founder, Shao Yibo, had done. But to Jack joining eBay seemed almost too simple, too predictable. On the other hand, buying a search engine and entering the hottest growth area of the Internet? That was a move no one would expect.
It also helped that Yahoo! gave us a partner who spoke the same language—literally. While Jack liked Meg Whitman personally, he believed she simply wanted to buy the Chinese market rather than build something that would truly benefit entrepreneurs in China over the long term. But the cofounder of Yahoo!, the Taiwanese American Jerry Yang, had a great working relationship with Jack. With common language and cultural roots, the two hit it off the first time they met, back in 1997, when Jack was still working for the government in Beijing. Jack had been assigned to show Jerry around, and they visited the Great Wall together. According to Jack, Jerry had even suggested Jack should join Yahoo! as the head of its China operations.
Jerry’s Taiwanese roots also helped open doors with the Chinese government. His familiarity with the culture and language provided some assurance to the government that Yahoo! would be a more accommodating partner than the average Western business. Hailing from Taiwan was not as politically correct as hailing from mainland China, but at least it seemed less foreign. Jerry had been an inspiration to Chinese entrepreneurs and, despite his company’s struggles, still had the halo of being the first Chinese American to have made it big on the Internet.
But one reason above all led to the deal. “For us this deal is all about search,” Jack explained. “We are going to be the only company in the world that brings B2B marketplaces, consumer marketplaces, payment, and search engines together in one company.”
If the structure of the deal was ambitious, the scale was staggering. Under the terms that had been drafted, Yahoo! would invest $1 billion in Alibaba Group and hand over its Yahoo! China operations. In exchange it would receive a 40 percent stake in Alibaba Group, valuing Alibaba at just over $4 billion. It was going to be one of the largest Internet deals in history and put Alibaba in the global spotlight.
“By the way, your shares are now worth $6.50 per share,” Jack told us at the meeting. The room let out a collective gasp. It was four times what we’d expected the shares to be worth. “And everyone in the company will have the opportunity to sell 25 percent of their shares at that price if the deal closes. It means we won’t have an IPO for a while, but it will at least give everyone a taste of the fruits of their labor.” It was exciting to think we were finally going to have a chance to see the value of our hard work and that the stock options we had on paper might actually be worth something. Allowing us to sell only 25 percent was a wise move by Jack and Joe Tsai, as it allowed staff members to taste the potential while leaving enough incentive for them to stay with the company for the long term. For myself, it created a personal milestone as well—five years after I first daydreamed about becoming a millionaire, it would finally happen. Rather than coming as a result of a long-planned IPO, my millionaire status had arrived when I least expected it. I took a deep breath and thought about what it would mean for my life.
“We have a lot of work to do before we announce the deal, and it’s still not finalized,” Jack went on. “The HR team is going to have a lot to prepare for, bringing in Yahoo! China to the Alibaba family. And PR is going to be extra busy. Porter, we’re going to need you to come out to Yahoo!’s headquarters as we finalize the deal, to help draft the announcement.”
A few weeks later I was walking down University Avenue in Palo Alto, California, just down a palm-lined street from the Spanish arches of my alma mater. I’d graduated in the Stanford class of 1992, into a recession. I had never used the Internet (few people had; commercial use of the Internet was only about a year old) and was unsure where my career might take me. The class just behind me generated the first batch of Internet millionaires, who stumbled into jobs at Yahoo! and Excite in their earliest days. But by the time the Internet really began to take off in the US, I was already in China. Now it had brought me back to Palo Alto, ten years after Jerry Yang and David Filo had first registered the domain Yahoo.com for their search engine. It was a homecoming made even sweeter by the thought that Alibaba would be joining forces with Yahoo!—the granddaddy of them all.
I met with Jack, Joe, and the rest of the deal team for dinner. They’d been working around the clock on the negotiations, and I quickly learned that although they’d agreed on broad strokes (in principle), the actual details were an entirely different matter. Joe and the lawyers had already gone several complicated rounds with Yahoo!, and a few sticking points remained. One was the sensitive question of how to announce the deal to best ensure its acceptance by the Chinese government.
Yahoo!’s goal was to create the perception that it was acquiring Alibaba. With a market value of roughly $40 billion, Yahoo! wanted to be seen by investors as aggressively expanding into China, rather than giving up on the China market and handing over its operations to a local company. Yahoo! executives seemed to think that the latter would make them look weak.
This goal was entirely at odds with our own. In our view positioning the deal as Yahoo!’s acquiring Alibaba was not only inaccurate. It put the future of Alibaba at risk in China by creating the perception that Alibaba was now under full control of Yahoo!, an American company. This would put us at a disadvantage with local government and partners on every issue, from gaining licenses to setting up new offices and research and development centers. It also would make Jack, already a recognized business leader in his own right, appear to be simply a puppet of Yahoo! in China. To maintain Jack’s credibility as a homegrown business leader, we had to make clear that we were still in charge.
“Porter, the way we announce this is critical. Tomorrow, when we go in there to discuss the announcement, we need you to be tough!” Jack instructed me.
The negotiations took on greater urgency on August 7, when the headline from Forbes.com hit everyone’s in-box: “Yahoo! in Talks on Record China Investment.” Someone had leaked the story, and the full details of the deal were in plain view. I immediately received a call from Mylene Mangalindan, a Bay Area–based correspondent for the Wall Street Journal who had been covering Alibaba’s battle with eBay.
“Hi, Porter, I read the rumors. So where are you now?”
“Oh, I’m back here in the US for a personal trip,” I replied. I could tell she didn’t believe me.
“So is there any truth to this, Porter?”
I had never been formally trained as a PR man, let alone involved in a deal this size, and I hesitated. I finally gave her the company line that Yahoo!’s communications chief, Christine Castro, had provided me: “We don’t comment on rumors and speculation.”
“Oh, come on, Porter, everyone does it. Just let me know if there’s any truth to this.”
I clammed up and repeated my corporate line. “I’m sorry, we don’t comment on rumors and speculation.”
Frustrated, Mylene got off the phone, saying, “Okay, let me know if you change your mind.”
I didn’t know where the leak had come from, but I suspected the source was one of our investors, since the public revelation of our negotiations put additional pressure on Yahoo!. We soon heard that the report had thrown the Yahoo! China team into upheaval. The idea that Yahoo! China might be sold to Alibaba would be a huge loss of face for Zhou Hongyi.
The rumors also spurred eBay into action. eBay had likely assumed it was Alibaba’s only suitor and its executives could take their time. Joe Tsai immediately received a call from eBay’s head of corporate development, who was hoping to reignite partnership discussions. And we were told by Softbank’s team that Meg Whitman was desperately trying to reach Masayoshi Son, Softbank’s CEO, but he was ignoring her calls.
The next day I headed to Yahoo!’s Silicon Valley offices to join the partnership discussions and coordinate the announcement with Yahoo!’s PR team. Yahoo!’s COO, Dan Rosensweig, led the talks that day. Tall and boisterous, he was a dominant figure. “We’d be in the lead in China already if it wasn’t for your government blocking us all these years!” he joked with Jack.
As we worked on the press release, Jack pulled me out of the meeting room to discuss the negotiating strategy.
“In a few minutes Jerry Yang is going to call to discuss how we position this. I want you to be very strong about how we need to phrase this as ‘Alibaba Acquiring Yahoo! China’ and not the other way around,” he said. “Don’t worry about me—I’m going to sit back and listen in. I’ll jump in if I feel I need to.”
With our good cop–bad cop strategy lined up, I jumped on the conference call. Ultimately we decided to describe the deal as a partnership and a combination of Yahoo! China and Alibaba. We left the press release vague enough that each side could call the deal whatever it wanted to when talking to its own investors. But we knew that same ambiguity also ensured there would be a race between Alibaba and Yahoo! to tell their version of events.
With the press release finished, one of the last remaining stumbling blocks to a deal was removed. Over lunch the next day Joe pulled out the contract’s signature pages for Jack to sign so they could be attached to the body of the contract once the final details were hammered out. Jack signed the pages, and we started to talk about how to manage the announcement back in China. “You should fly directly to Beijing,” Jack said. “We’re going to have the announcement there. This is going to be big news.”
Later that night I got a call from Joe as I packed my bags. “Porter, I’m sorry to say, but it looks like the deal is off. Yahoo! has added a last-minute demand to the contract. They are now insisting on calling the new combined business ‘Alibaba-Yahoo!’ That would create real problems for us in China. And not only that, I don’t think we can do business with a partner who tries to sneak in such a big condition at the last minute.”
The Yahoo! people apparently assumed we’d cave at the last minute.
“I was planning to fly back tomorrow to China,” I said. “Should I just go ahead and do that, and tell Yahoo!’s PR team that you sent me back because the deal is off?”
“Yeah, good idea,” Joe replied. “I’ll see you back in China.”
Later that night I got a call from Chris Castro, Yahoo!’s head of corporate communications. Chris asked: “Porter, when should we meet tomorrow to go over the new draft of the press release?”
“Oh, Jack and Joe told me that the deal is off. You hadn’t heard that?” I asked. “So I’m flying out tomorrow morning.”
Chris seemed surprised and concerned. “No, actually, I hadn’t heard anything like that. Are you sure?”
“Yeah, I’m flying back tomorrow. It’s too bad the deal didn’t work out, as I would have liked to work with you.”
The next day, I got on the plane and settled in for the long flight to Shanghai. I admired Jack and Joe for standing up to Yahoo! on principle. I probably wouldn’t have had the conviction to turn down a $1 billion cash offer. But I also felt a twinge of regret. The Yahoo! deal would have put us in the global spotlight and ensured that Alibaba had enough in the coffers to sustain eBay’s $100 million assault on us.
Upon touching down in Shanghai, I picked up my bags and got in a taxi. The familiar gray skies hovering over the countryside told me I was back to life as usual.
I turned on my phone and it began to ring almost immediately. It was Jack.
“Hey, Jack, what’s up? I just touched down in Shanghai.”
Jack’s voice had an excited and urgent tone. “Get on the next flight you can to Beijing. Yahoo!’s given in on the final point—the deal is back on! We’re announcing it the day after tomorrow.”