Note 8 INVESTMENTS IN EQUITY INTERESTS

As of December 31, investments in equity interests consisted of the following (dollars in thousands):


	2012		2012 Percent Ownership			2013		2013 Percent Ownership
Alibaba Group	$	276,389		24	%	$	1,018,126		24	%
Yahoo Japan		2,555,717		35	%		2,399,590		35	%
Other		8,051		24	%		8,631		19	%

Total	$	2,840,157				$	3,426,347

Equity Investment in Alibaba Group. On October 23, 2005, the Company acquired approximately 46 percent of the outstanding common stock of the Alibaba Group, which represented approximately 40 percent on a fully diluted basis, in exchange for $1.0 billion in cash, the contribution of the Company’s China-based businesses (“Yahoo China”), and direct transaction costs of $8 million. Another investor in Alibaba Group is Softbank Corp., a Japanese corporation (“Softbank”). Alibaba Group is a privately-held company.

The Company’s initial purchase price was based on acquiring a 40 percent equity interest in Alibaba Group on a fully diluted basis; however, the Company acquired a 46 percent interest based on outstanding shares. In allocating the initial excess of the carrying value of the investment in Alibaba Group over its proportionate share of the net assets of Alibaba Group, the Company allocated a portion of the excess to goodwill to account for the estimated reductions in the carrying value of the investment in Alibaba that may occur as the Company’s equity interest is diluted to 40 percent based on specific events anticipated at the time. As of both December 31, 2012 and 2013, the Company’s ownership interest in Alibaba Group was approximately 24 percent as a result of the Initial Repurchase described below.

The investment in Alibaba Group is being accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in equity interests on the Company’s consolidated balance sheets.

The Company’s accounting policy is to record its share of the results of Alibaba Group one quarter in arrears, within earnings in equity interests in the consolidated statements of income. As of December 31, 2013, the excess of carrying value of the Company’s investment in Alibaba Group and the Company’s proportionate share of the net assets of Alibaba Group is largely attributable to goodwill.

The Company entered into a patent sale agreement with a wholly-owned affiliate of Alibaba Group during the fourth quarter of 2013 pursuant to which the Company sold certain patents for aggregate consideration of $70 million. The gain on sale of these patents is recorded as a part of gains on sales of patents in the consolidated statements of income.

Framework Agreement with Alibaba Group regarding Alipay. Alibaba Group restructured the ownership of Alipay.com Co., Ltd. (“Alipay”) and deconsolidated Alipay in the first quarter of 2011. The impact of the deconsolidation of Alipay was not material to the Company’s financial statements. On July 29, 2011, the Company entered into a Framework Agreement (the “Framework Agreement”) with Alibaba Group, Softbank, Alipay, APN Ltd., a company organized under the laws of the Cayman Islands (“IPCo”), Zhejiang Alibaba E-Commerce Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“HoldCo”), Jack Ma Yun, Joseph C. Tsai and certain security holders of Alipay or HoldCo as joinder parties. The Framework Agreement establishes the ongoing financial and other arrangements between Alibaba Group and Alipay. The transactions under the Framework Agreement closed on December 14, 2011.

Pursuant to the terms of the Framework Agreement and related documents: (1) Alibaba Group will receive certain payments (“Liquidity Event Payment”) upon a liquidity event related to Alipay, such as an initial public offering or sale of Alipay; (2) Alibaba Group received a non-interest bearing promissory note in the principal amount of $500 million with a seven year maturity, subject to earlier prepayment or acceleration (the “IPCo Promissory Note”); (3) upon payment in full of the Liquidity Event Payment certain assets used in the Alipay business that were retained by Alibaba Group will be transferred to Alipay; (4) Alibaba Group and Alipay entered into a long-term agreement pursuant to which Alibaba Group will receive payment processing services on preferential terms from Alipay and its subsidiaries; and (5) Alibaba Group licensed to Alipay certain intellectual property and technology and performs certain software technology services for Alipay and in return Alipay pays to Alibaba Group a royalty and software technology services fee.

The royalty and software technology services fee and the payment processing services fees discussed above approximate the estimated fair values of such services and are recognized in Alibaba Group’s financial statements as income or expense, as applicable, as the services are rendered. The Company will record its share, if any, of the results of these transactions as they are recorded by Alibaba Group within Yahoo’s earnings in equity interests in the consolidated statements of income. Alibaba Group will recognize the Liquidity Event Payment, the payment of the IPCo Promissory Note, and any impact from the transfer of assets, described above, if and when such payments or transfers occur. The Company will record its share, if any, of the results of these transactions as they are recorded by Alibaba Group within the Company’s earnings in equity interests in the consolidated statements of income.

Initial Repurchase by Alibaba Group. On September 18, 2012 (the “Repurchase Closing Date”), Alibaba Group repurchased 523 million of the 1,047 million ordinary shares of Alibaba Group (the “Shares”) owned by the Company (the “Initial Repurchase”). The Initial Repurchase was made pursuant to the terms of the Share Repurchase and Preference Share Sale Agreement entered into by Yahoo! Inc., Alibaba Group and Yahoo! Hong Kong Holdings Limited, a Hong Kong corporation and wholly-owned subsidiary of Yahoo! Inc. (“YHK”), on May 20, 2012 (as amended on September 11, 2012, the “Repurchase Agreement”). Yahoo received $13.54 per Share, or approximately $7.1 billion in total consideration, for the 523 million Shares sold to Alibaba Group. Approximately $6.3 billion of the consideration was received in cash and $800 million was received in Alibaba Group Preference Shares, which Alibaba redeemed for cash on May 16, 2013. The Initial Repurchase resulted in a pre-tax gain of approximately $4.6 billion during the year ended December 31, 2012.

The Alibaba Group Preference Shares yielded semi-annual dividends at a rate per annum of up to 10 percent, with at least 3 percent payable in cash and the remainder accruing and increasing the liquidation preference. The Alibaba Group Preference Shares were callable by Alibaba Group at the redemption value (including accrued dividends). On May 16, 2013, the Company received $846 million in cash from Alibaba Group to redeem the Alibaba Group Preference Shares. The cash received represented the redemption value, which included the stated value of $800 million plus accrued dividends of $46 million.

The Repurchase Agreement provided that at the time Alibaba Group completes an initial public offering meeting certain specified criteria (a “Qualified IPO”), Yahoo and YHK would sell, at Alibaba Group’s election (either directly to Alibaba Group or in the Qualified IPO), up to 261.5 million of their remaining Shares. This amount was subsequently reduced to 208.0 million by an amendment to the Repurchase Agreement dated as of October 14, 2013. If Shares are sold back to Alibaba Group in the Qualified IPO, the purchase price per Share will be equal to the per share price in the Qualified IPO less specified fees and underwriter discounts.

On the Repurchase Closing Date, the Company and Alibaba Group entered into an amendment of their existing Technology and Intellectual Property License Agreement (the “TIPLA”) pursuant to which Alibaba Group made an initial payment to the Company of $550 million in satisfaction of certain future royalty payments under the existing TIPLA. The Company will recognize this revenue over the remaining four-year term. For the years ended December 31, 2012 and 2013, the Company recognized approximately $39 million and $137 million in revenue related to the TIPLA. Alibaba Group will continue making royalty payments until the earlier of the fourth anniversary of the effective date of the amendment and a Qualified IPO. Pursuant to the terms of the TIPLA, the Company also recognized revenue of approximately $44 million, $86 million, and $122 million for the years ended December 31, 2011, 2012, and 2013, respectively.

The following table presents Alibaba Group’s U.S. GAAP financial information, as derived from the Alibaba Group financial statements (in thousands):


	Twelve Months Ended September 30,
	2011		2012		2013
Operating data:
Revenue	$	2,344,973	$	4,082,838	$	6,734,978
Gross profit	$	1,557,392	$	2,764,314	$	4,909,327
Income from operations	$	325,334	$	687,632	$	3,103,664
Net income	$	339,552	$	536,050	$	2,847,139
Net income attributable to Alibaba Group	$	268,004	$	484,511	$	2,809,429


	September 30, 2012		September 30, 2013
Balance sheet data:
Current assets	$	4,062,823	$	7,994,731
Long-term assets	$	3,204,144	$	5,959,835
Current liabilities	$	2,624,656	$	4,838,510
Long-term liabilities	$	4,705,347	$	5,319,113
Convertible preferred shares	$	1,317,526	$	1,688,889
Noncontrolling interests	$	65,907	$	92,127

Since acquiring its interest in Alibaba Group, the Company has recorded, in retained earnings, cumulative earnings in equity interests, net of tax, of $661 million and $1,078 million as of December 31, 2012 and 2013, respectively.

Equity Investment in Yahoo Japan. During April 1996, the Company signed a joint venture agreement with Softbank, which was amended in September 1997, whereby Yahoo Japan Corporation (“Yahoo Japan”) was formed. Yahoo Japan was formed to establish and manage a local version of Yahoo in Japan.

The investment in Yahoo Japan is being accounted for using the equity method and the total investment, including net tangible assets, identifiable intangible assets, and goodwill, is classified as part of the investments in equity interests balance on the Company’s consolidated balance sheets. The Company records its share of the results of Yahoo Japan and any related amortization expense, one quarter in arrears, within earnings in equity interests in the consolidated statements of income.

The Company makes adjustments to its earnings in equity interests line in the consolidated statements of income for any differences between U.S. GAAP and accounting principles generally accepted in Japan (“Japanese GAAP”), the standard by which Yahoo Japan’s financial statements are prepared.

During the year ended December 31, 2011, the Company recorded $33 million in U.S. GAAP adjustments to Yahoo Japan’s net income to reflect the Company’s 35 percent share of non-cash losses related to impairments of assets held by Yahoo Japan. The $33 million recorded during the year ended December 31, 2011 primarily includes $7 million related to the Company’s share of a non-cash loss in connection with an impairment of assets held by Yahoo Japan in the second quarter of 2011, and a $26 million U.S. GAAP adjustment to Yahoo Japan’s net income in the first quarter of 2011 to reflect the Company’s share of an other-than-temporary impairment of a cost-method investment of Yahoo Japan that resulted primarily from reductions in the projected operating results of the Yahoo Japan investee.

The fair value of the Company’s ownership in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $11 billion as of December 31, 2013.

During the years ended December 31, 2011, 2012 and 2013, the Company received cash dividends from Yahoo Japan in the amounts of $75 million, $84 million, and $77 million, net of tax, respectively, which were recorded as reductions in the Company’s investment in Yahoo Japan.

The following tables present summarized financial information derived from Yahoo Japan’s consolidated financial statements, which are prepared on the basis of Japanese GAAP. The Company has made adjustments to the Yahoo Japan financial information to address differences between Japanese GAAP and U.S. GAAP that materially impact the summarized financial information below. Due to these adjustments, the Yahoo Japan summarized financial information presented below is not materially different than such information presented on the basis of U.S. GAAP.


	Twelve Months Ended September 30,
	2011		2012		2013
Operating data:
Revenue	$	3,988,377	$	4,242,623	$	4,296,522
Gross profit	$	3,311,357	$	3,594,633	$	3,577,001
Income from operations	$	1,963,924	$	2,189,323	$	2,150,644
Net income	$	1,114,637	$	1,313,494	$	1,365,443
Net income attributable to Yahoo Japan	$	1,108,390	$	1,308,539	$	1,355,457


	September 30,
	2012		2013
Balance sheet data:
Current assets	$	5,752,826	$	6,318,156
Long-term assets	$	1,837,829	$	1,728,912
Current liabilities	$	1,167,772	$	1,992,508
Long-term liabilities	$	49,461	$	56,762
Noncontrolling interests	$	31,034	$	74,754

Since acquiring its equity interest in Yahoo Japan, the Company has recorded cumulative earnings in equity interests, net of dividends received and related taxes on dividends, of $2.3 billion and $2.8 billion as of December 31, 2012 and 2013, respectively.

Under technology and trademark license and other commercial arrangements with Yahoo Japan, the Company records revenue from Yahoo Japan based on a percentage of advertising revenue earned by Yahoo Japan. The Company recorded revenue from Yahoo Japan of approximately $287 million, $281 million, and $266 million, respectively, for the years ended December 31, 2011, 2012, and 2013. As of December 31, 2012 and 2013, the Company had net receivable balances from Yahoo Japan of approximately $43 million and $42 million, respectively.