Yahoo Divests Half Its Alibaba Stake For $7.1 BillionYahoo Divests Half Its Alibaba Stake For $7.1 Billion

Yahoo interim CEO Ross Levinsohn wasted little time putting his stamp on the company. The struggling Internet portal said Sunday that it agreed to return half of its 40% stake in Alibaba to the Chinese Web operator in a deal valued at $7.1 billion in cash and stock.

The sale gives Yahoo a $6.3 billion cash injection and it puts Alibaba in a better position to launch an initial public offering of its shares, a move it has been hinting at for several months.

The tepid performance of Facebook's IPO--shares fell almost 11% early Monday to $34.06--may, however, temper Alibaba's ambition to go public if it perceives that investor appetite for Internet companies is weak.

Yahoo initially purchased its stake in Alibaba in 2005 for about $1 billion with an eye to gaining a foothold in the burgeoning Chinese Internet and mobile markets. But Yahoo has since retrenched as it has struggled to keep up with rivals like Google and Facebook in key U.S. markets for search and social networking. In 2009, it struck a deal to farm out Web search on its pages to Microsoft's Bing service.

[ What went wrong at Yahoo?: See 3 Lessons From Yahoo's Meltdown, From an Insider. ]

Last month, under then CEO Scott Thompson, Yahoo announced a turnaround plan that called for 2,000 employees to be laid off. But Thompson himself was out just a month later, ousted as the result of a scandal arising from his falsely claiming to have a computer science degree. He was replaced by Levinsohn on May 13.

Sunday's deal does not completely detach Yahoo from Alibaba or the Chinese Internet market. Yahoo retains, for now, a 20% stake in Alibaba, which may be sold if the latter goes public. The agreement also calls for Alibaba to continue operating the Yahoo! China brand under license for Yahoo from Yahoo for up to four years.

"Today's announcement provides clarity for our shareholders on a substantial component of Yahoo's value and reaffirms the significance of our relationship with Alibaba," said Levinsohn, in a statement. Alibaba will also license certain undisclosed patents from Yahoo.

News of the deal did little to boost Yahoo shares, up half a percent, to $15.50, in early trading Monday, despite the fact that the company said it would return most of the proceeds from the agreement to stockholders.

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