Pressure on Scott Thompson as Yahoo, Alibaba Deal Falls Apart

Yahoo (NASDAQ: YHOO) may be unable to sell its stake in Alibaba (HKG: 1688), the Chinese site that connects manufacturers, distributors, retailers, and individuals. Alibaba has been a highly profitable business, and Yahoo took a 40 percent interest in the company early on in 2005. Currently, the American search engine has around $14 billion in the company.

Yahoo had been looking for a tax-efficient strategy to reduce its holdings in the firm, with Alibaba hoping to raise money from bank loans, cash, and an asset swap to buy back a 25 percent ownership stake that represents the maority of Yahoo's current holdings. In addition to a $3 billion bank loan, the company was also planning on selling Yahoo a stake in one of its operating assets, which would allow the American company to avoid paying taxes on the sale.

Reuters is reporting that the deal has hit a snag thanks to Daniel Loeb, manager of the privade hedge fund Third Point, who is seeking to put his own directors on Yahoo's board after the company chose Scott Thompson as its new CEO. Alibaba has responded by going to Thompson directly, bypassing negotiators, in the hopes of getting clarity on the matter. According to the Associated Press, Yahoo wants to "free up some cash and focus on the core" at a time when it has lost direction after burning through three CEOs in five years. The most recent CEO, Carol Bartz, was fired after the company's disappointment at a search partnership with MSN.

Bartz did not take kindly to getting canned. "These people fucked me over," she said in an interview that had Silicon Valley reeling. She also called Yahoo's directors "doofuses."

Yahoo has since put its bet on Thompson as a guiding force to lead the company as it sees its market share vanishing thanks to gains at Bing and continued strength at Google.

The standoff with Loeb may be Thompson's first major moment, as he can either respond directly to Alibaba's offer or confer with the board and external investors. Yahoo will need to act quickly to please investors, who are not happy with the stock's performance. While the market, particularly financial companies, have rallied thanks to renewed confidence in the American consumer and hope that European problems will soon be history, the search engine is down nearly 5 percent for the year, although investors can take heart that the company is faring better than Google's near 6 percent loss thanks in large part to a rare earnings disappointment last quarter.

Still, Yahoo needs a shakeup of its current operations, and the bet on a move away from Alibaba, which will free up cash to make new investments in its American operations, may be a smart move. On the other hand, a move away from profitable operations may show the company chasing after bad money with good. Yahoo would not like to admit that, as it would be an admission of defeat against Google and MSN. Plus, such an admission would be premature in the ever-changing search engine business, considering Yahoo's sizeable assets and still-prominent market position could put it in a strong position to acquire a successful start-up or even to invest heavily in a rising star in the tech world.

Until it can close the deal with Alibaba, any investments will have to wait, but that may not be what Thompson wants. He's a new, fresh CEO, and he may be eager to prove himself. On the other hand, his low profile but successful run of PayPal may suggest that he is a more cautious manager, and will confer carefully with investors and executives before reaching out to Alibaba directly. Such a conservative move may put the deal at a standstill, and leave Yahoo running in place.

The company desperately needs revenue growth, and Thompson has said that "we have got to be able to grow this business. There is no question that is priority no. 1." As executives and investors squabble over what move will grow the company, Thompson may need to make a decision quickly.