Yahoo!'s Alibaba Mess: How to Clean It Up

By Eric Jackson05/13/11 - 02:10 PM EDT

NEW YORK (TheStreet) -- I'm astounded at the series of statements that have come out of Yahoo! (YHOO_) and Alibaba Group over the past few days, which have sent Yahoo!'s stock into a tailspin.

Alibaba said that more than two years ago, the Chinese government required the company's board to transfer ownership to a Chinese-held entity, which Alibaba then started to execute last summer.

Yahoo! said that matter was never brought to its attention, and that both Yahoo! and Softbank were deceived by Alibaba.

It's a "he said, she said" squabble in public that's not professional and has sent Yahoo's stock tumbling to just below $16 this morning.

How could the communication be so poor between Yahoo! and the biggest partner it has to let this happen? Where was the oversight from Yahoo!'s board?

What Yahoo! shouldn't do here is:

Sue Alibaba

Continue blaming Alibaba for deceiving Yahoo!

Keep quiet

What Yahoo! needs to do is:

Hold a conference call with investors immediately to update them on the situation and how Yahoo! is addressing the issue now.

Show that there will be a change from Yahoo!'s board on how Yahoo! handles the Alibaba relationship. At the very least, Chairman Roy Bostock should fall on his sword and Yahoo! should install a new Chairman who makes it clear that this relationship will be handled appropriately.

Yahoo! should spend 98% of the upcoming Investor Day talking about this relationship rather than 98% of it on the "core" business which is an afterthought for most Yahoo! investors. That means that Jerry Yang should join Carol at the meeting and be prepared.

I believe there is still great value in Yahoo!'s shares despite the sharp drop this morning. The stock has already started to rally this afternoon. The fears of Yahoo! getting zero value out of its Alibaba relationship are overblown.

There is potentially some very harmful blowback to all Chinese companies if that scenario played out. U.S. investors would worry that they cannot trust the numbers of any Chinese company -- no matter how good the growth that is expected.

Already, some Chinese CEOs have taken to Sina's (SINA_) Weibo service overnight, expressing their concern about that negative fallout (although others have praised Jack Ma for being a "patriotic maverick" fighting against the Americans and Japanese).

Alibaba wants a good outcome and so does Yahoo! However, if Jack Ma's goal in all this was to put the fear of God into Yahoo! shareholders, congratulations to him -- he succeeded.

Whatever the "status quo" was at Yahoo! for managing the Alibaba relationship, it can't be allowed to continue. Investors need to hear how it's changing immediately.

At the time of publication, Jackson was long YHOO and SINA.

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