Recruiting in China

Yahoo! Inc's secret weapon in its effort to squeeze a higher offer out of Microsoft Corp resides in Asia's surging Internet market.

Yahoo has investments worth US$13.8 billion in Alibaba.com Corp, parent of China's largest online trading site, and Yahoo Japan Corp. That accounts for almost one-third of the US$31 a share Microsoft is offering, Bloomberg News reported.

In one year, the value of those stakes may balloon 15 percent to US$15.9 billion, according to analyst estimates.

Unlike the United States search market, where Microsoft and Yahoo have been beaten down by Google Inc in text advertisements, Asia is geared more toward graphical banner ads where Google has less of a presence.

In China, the world's second-largest Web market, online trading between companies may almost quadruple to the equivalent of US$1.05 trillion by 2010.

Yahoo investors may benefit as Microsoft pays more to gain access to this growth.

"Alibaba is a good franchise in the fastest-growing Internet market," said Kevin Landis at Firsthand Capital Management in California.

"Stubbornly, these Yahoo shares didn't respond to that.

''I think if you gave it time, they would."

In rejecting Microsoft last week, Yahoo Chief Executive Officer Jerry Yang cited investments in Alibaba and Yahoo Japan as reasons the offer "substantially undervalues" Yahoo.

No competing bid has yet emerged.

Yahoo is in talks to combine Internet operations with those of Rupert Murdoch's News Corp, sources said.

However, Yahoo spokeswoman Tracy Schmaler and News Corp spokeswoman Julie Henderson declined to comment.

Alibaba stake

Yahoo in 2005 swapped US$1 billion and its China units for 39 percent of privately held Alibaba.com Corp in Hangzhou.

The initial public offering last year of its Alibaba.com Ltd unit raised HK$13.1 billion (US$1.68 billion), the biggest IPO for an Internet company since Google in 2004.

Alibaba.com Corp also owns Web-auction site Taobao and online payment unit Alipay.

Sales from Taobao's site more than doubled last year as rising incomes in China lifted the number of Internet users by 53 percent.

The amount of goods and services traded on the Web by Chinese companies may increase to 7.54 trillion yuan (US$1.05 trillion) in 2010, from 2.1 trillion yuan last year, according to Ping An Securities Co.

Stifel Nicolaus analyst George Askew in Baltimore valued Yahoo's holdings in Alibaba.com Corp at US$4.93 billion as of a week ago.

With 33 percent control of Yahoo Japan and a 10-percent stake in South Korea's GMarket Inc, Yahoo's Asian investments equals US$13.6 billion, or US$9.74 a share, Askew said.

"Yahoo's stronger position in Asia is one of the rationales for Microsoft's takeover bid," said Ivan Li, an analyst at Kim Eng Securities (HK) Ltd in Hong Kong.

Microsoft is pursuing Yahoo to bolster competition with Google in an online ad market that may double to US$80 billion by 2011.

Yahoo Japan, the country's most popular Website, attracted 88 percent of local users in December, compared with 56 percent for Google.

It also offers access to a mobile-phone market where more than half of subscribers surf the Web.

China key

The Asian properties would be a boon for Microsoft, whose Internet business there lags behind competitors, said Claus Mortensen, a Hong Kong-based analyst.

Microsoft handled 1.2 percent of search queries in Asia in December, compared with Google's 38.2 percent and 24.9 percent for Yahoo.

Display ads are 52 percent of the online market in Asia, compared with 20 percent for search.

In the US, search accounts for 40 percent, versus 31 percent for display and video.

Almost all of Google's US$16.6 billion in sales last year came from search.

Microsoft faces challenges retaining Alibaba and Yahoo Japan clients wary of the world's biggest software maker, said JupiterResearch analyst Neil Strother.

"On paper it gives Microsoft a bit of a leg up," Strother said.

"Can they hold onto customers or do the customers decide that Yahoo Japan or Alibaba have just become the same as Microsoft?"