updated 8/11/2005 12:29:05 PM ET 2005-08-11T16:29:05

Yahoo Inc. announced Thursday it would pay $1 billion in cash for a 40 percent stake in the Chinese e-commerce firm Alibaba.com, heating up the race to dominate China’s fledgling online auctions industry.

The alliance is the biggest deal yet in a flurry of recent investments in China by foreign Internet companies eager for a share of a market with more than 100 million people online.

Alibaba runs Chinese- and English-language auction sites for foreign companies looking for Chinese wholesale suppliers and individual Chinese buyers and sellers.

Yahoo also will merge its China-based subsidiaries into Alibaba, the two companies said. The combined entity will include 3721.com, a Chinese-language search engine that Yahoo acquired last year.

The deal represents a challenge to auction powerhouse eBay which in 2003 bought a Chinese portal, eachnet.com.

“This is really probably the knockout blow for eBay in China,” said Porter Erisman, Alibaba’s vice president for international relations.

Erisman said the deal makes Yahoo and its local partners such as Alibaba the dominant players in online auctions in China, Japan, Taiwan and Hong Kong.

“This is going to make it hard for eBay to win in Asia,” he said. “It totally reshapes the landscape for auctions in Asia.”

San Jose, Calif.-based eBay rejected suggestions that the Yahoo-Alibaba tie-up was a threat, saying eBay expects to dominate the market.

“We will maintain our leading position in China,” said Liu Wei, a spokeswoman in Shanghai for eBay eachnet.

Full range of Internet businesses
Yahoo will have 35 percent of voting rights in Alibaba as a result of the investment, in a deal expected to be completed in the fourth quarter of this year, the two companies said.

“This is Yahoo getting much bigger in China,” Daniel Rosensweig, chief operating officer of Yahoo, said at a news conference with Alibaba’s founder, Jack Ma. “We look at this as an opportunity to get much bigger much faster working with a great management team.”

Rosensweig said the deal creates an entity with assets to compete across the full range of Internet businesses in China — search engines, e-mail and online commerce.

Yahoo expects China to be the world’s biggest Internet market within five years, he said.

Alibaba, founded in 1999, has made Ma one of China’s most prominent Internet entrepreneurs. The company is based in the eastern Chinese city of Hangzhou, southwest of Shanghai.

According to Erisman, it had $68 million in revenue last year from advertisers and companies that pay $5,000-$10,000 per year for membership in its commercial online auction service.

Alibaba plans to use Yahoo’s $1 billion investment to expand its search, e-mail and other services, said Joe Tsai, the company’s chief financial officer.

“These are all relatively capital-intensive businesses,” he said in a telephone interview. “So this cash is quite welcome for us to execute the strategy.”

News of the deal comes just days after an initial stock offering in the United States by another Chinese online firm, search engine Baidu.com, set off a frenzy of buying. Its shares soared more than 350 percent in their first day of trading last Friday before declining slightly this week.

The Chinese government said last month that the number of people online in China had reached 103 million — the second-biggest population of Web users after the United States.

But Chinese online commerce is still in its infancy and consumer spending is low in a society where urban incomes average just $1,000 a year.

Consumer-to-consumer online sales in China totaled about $500 million last year, while business-to-consumer sales were about $1 billion, according to Tsai.

The new entity will have a four-person board led by Ma as chairman, with a second seat held by Alibaba and the others held by Yahoo co-founder Jerry Yang and a representative of Softbank, the Japanese firm that is a big Yahoo shareholder.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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