The Loveless Marriage of Alibaba and Yahoo!

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Lang Lang / Reuters

Employees walk inside the headquarters of Alibaba on the outskirts of Hangzhou, Zhejiang province, March 16, 2010

Jack Ma is already a billionaire and one of China's most spectacularly successful Internet entrepreneurs. The company he founded and now heads, Alibaba Group, controls a trio of China's fastest-growing e-commerce businesses: Taobao, the country's largest retail website with 200 million users;, China's leading business-to-business e-commerce site; and Alipay, China's version of PayPal, with more than 300 million users. But Ma wants more. Specifically, he'll settle for nothing less than total domination of the global e-commerce market. "If Alibaba cannot become a Microsoft or Walmart, I will regret it for the rest of my life," he said in an interview last year.

There may be something else Ma regrets right now: selling a 40% stake of Alibaba Group to the U.S. Internet giant Yahoo! several years ago. When the deal was struck by Ma and his longtime friend Jerry Yang, co-founder of Yahoo!, in 2005, observers saw it as a bold move to thwart eBay's planned expansion into the lucrative China e-commerce market. Alibaba, which was still building up its business, received $1 billion and control over Yahoo!'s China site in return for the shares. And a year later, eBay largely pulled out of China, unable to compete with Taobao to gain a foothold in the market.

Now, however, relations between the onetime allies have soured to such an extent, they seem more like spouses trapped in a loveless marriage than business partners — and they appear headed for divorce. According to Alibaba spokesman John Spelich, it nearly happened very recently. Spelich said Thursday that Alibaba had made an offer to Yahoo! to buy back part of the company's shares and "maximize the value of their remaining stake," but Yahoo! rejected the deal. The American firm then made a counterproposal that Alibaba found "unjustifiable," after which Alibaba cut off negotiations, Spelich tells TIME.

This followed a nearly 5% spike in Yahoo!'s stock price on Wednesday — up 64 cents to $14.27 — after an analyst from Susquehanna Financial Group speculated that a sale could be close, based on a report on a Chinese news website. Yahoo! CEO Carol Bartz quickly tried to dispel the rumors Wednesday, saying that Yahoo! had no plans to sell its stake, which Susquehanna has valued at between $4 billion and $11 billion. Analysts have said Yahoo! would be loath to let go of its Alibaba shares before the group's highly profitable companies, Taobao and Alipay, go public, but Yahoo! may instead be open to a deal.

"They have a fiduciary duty to evaluate any serious material offer, so maybe there's a number they can get to that they'll happily exit this stake," says Bill Bishop, co-founder of the financial-news site who now blogs about the Internet in China. "At this point it's purely financial [for Yahoo!] ... They'll get out if the price is right, but it's pretty clear they're going to do it on their own terms."

Although Yahoo! made a killing when went public in 2007, the company has had a rough time overall in China, stumbling particularly badly when it comes to its p.r. skills. Last September, Yahoo! announced it was selling its 1% direct stake in — a move that caught Alibaba executives by surprise and came at a curious time as Alibaba was celebrating its 10th anniversary and Ma's 45th birthday at its annual AliFest conference in the Chinese city of Hangzhou. Then, in January, Yahoo! sided with Google in its dispute with the Chinese government over censorship and cyberattacks, a position Alibaba blasted as "reckless."

The latest tiff between the sides broke out when a Yahoo! executive in Hong Kong told the South China Morning Post last week — on the eve of this year's AliFest event — that Yahoo!'s Hong Kong site was reaching out to mainland Chinese businesses for advertising. Accusing Yahoo! of encroaching on its turf, Alibaba again went public with its displeasure — this time suggesting it could lead to a split. David Wei,'s CEO, was blunt, telling Bloomberg, "Why do we need a financial investor with no business synergy or technology?"

For its part, Yahoo! has reportedly been unhappy that its share of the Chinese search market has plummeted since Alibaba took over the China business. Although Yahoo! won't comment publicly on the state of its relations with Alibaba now, it has defended the ad sales in mainland China. "We are always looking for revenue-growth opportunities," spokeswoman May Petry tells TIME. "China-based companies buying ads on the Yahoo! Hong Kong network does not affect the investment [in Alibaba]."

But analysts say the problems between the companies are more deep-seated than this. "Yahoo! and Alibaba just don't have that much in common from a strategic perspective anymore," says Sarah Lacy, an editor at large at TechCrunch, a Silicon Valley blog on the Internet and technology. "The biggest thing is that Alibaba has turned out to be a more valuable property than anyone thought ... and if Yahoo! isn't adding anything and isn't appreciating it, you can understand why they'd want that equity freed up."

It's eBay, ironically, who could stand to benefit from the discord. As Alibaba and Yahoo! have wrangled over the past year, the Chinese firm has grown much closer with its former chief rival. John Donahoe, eBay's CEO, even made a high-profile appearance alongside California Governor Arnold Schwarzenegger at this year's AliFest and gushed over his "enormous respect" for Ma. In return, Ma said that even though Alibaba and eBay have been competitors in the past, they share the "same goal to help entrepreneurs" and can work closely together in the future.

Indeed, they're already testing the waters. Earlier this year, the two companies signed a deal allowing users of one of Alibaba's other e-commerce sites,, to make payments for goods on PayPal, a subsidiary of eBay. Neither company has commented on what other deals may be in the works, but Donahoe has said he's eager to explore any opportunities that will allow eBay to expand its China revenue now that it has surrendered the market. For Alibaba, cooperation with eBay could help the company connect its sellers in China — mainly small- and medium-sized businesses — with buyers in the rest of the world. It all comes down to Ma's plan for global domination — one Internet purchase at a time.