Yahoo! boosts Chinese presence with $1bn stake in Alibaba.com

Yahoo!, the internet portal, said yesterday it would pay $1bn (£550m) in cash for a stake in China's biggest online retailer, Alibaba.com, boosting its presence in the country's booming internet industry.

The company plans to merge its China subsidiaries into Alibaba as part of the deal. Daniel Rosensweig, the chief operating officer of Yahoo!, said in Beijing: "We look at this as an opportunity to get much bigger much faster, working with a great management team." Yahoo! now owns a 40 per cent stake in Alibaba and will become its largest strategic investor.

The alliance creates China's biggest internet company, with activities including search engines, online bill payment services and consumer e-commerce. Alibaba also operates an online auction business, and laid down a challenge yesterday to the dominance of eBay, saying it wants the newly enlarged business to strike a "knockout blow" to eBay's ambitions in Asia. Yahoo! should gain a 43 per cent share of the Chinese online auction market from the deal, bringing it close to eBay's 50 per cent share.

Yahoo!'s acquisition also marks the growing interest in the technology sector towards China, which has about 100 million internet users - second only to the US. China is expected to become the world's largest internet market within the next five years, and valuations of Chinese online businesses have been soaring in recent months.

Baidu.com, a Chinese search engine, listed on Nasdaq in the US last week and has already seen its share price quadruple on hopes that the company will become the "Chinese Google". Google operates its own Chinese language search site. The $1bn paid by Yahoo! is the largest stake invested by a foreign company in a Chinese internet business.

The deal will transform Yahoo!'s business in China. It bought the Chinese search engine, 3721, in 2003 for $120m, but has so far failed to make significant inroads in the local market. Alibaba has 14 million users and reported sales of $46m last year.

Alibaba's founder, Jack Ma, will remain as chief executive and will run the combined operations. The company's major shareholder is Japan's Softbank, which sold shares to Yahoo!. Mr Ma is thought to have netted a substantial amount from the transaction.

The market for online auctions is still in its relative infancy in China, with only 12 million Chinese using websites to transact goods. This figure is expected to swell to 35 million over the next two years, and Alibaba, whose online auction is called Taobao.com, anticipates sales will grow at an annual rate of 80 per cent in the next three years.

It also has business-to-business auction sites that help small enterprises buy and sell goods and export products to international markets. Advertisers and companies pay up to $10,000 a year for membership of the scheme..

Alibaba was founded in 1999 an has 2,300 employees based in Hangzhou, south of Shanghai.