IPO time for Alibaba

In 2005, Yahoo paid $1 billion for a 40% stake in the up-and-coming Chinese Internet company Alibaba. The deal, which emerged from the friendship between co-founder Jerry Yang and Alibaba CEO Jack Ma, was negotiated by Yang and then-CEO Terry Semel. At the time, it was the largest in a series of foreign investments in Chinese Internet businesses as tech companies scrambled for a piece of the web surfers newly coming online. As a condition of the deal, Yahoo was given 40% of the company’s voting rights, and Alibaba could use and grow the Yahoo brand in China.

But soon Alibaba began looking for ways out of the deal early as the companies shared increasingly less in common strategically. Former CEO Scott Thompson, who was at Yahoo just five months before he resigned for laying claim to a computer-science degree he didn’t have, is the guy responsible for revising the deal in 2012, though it was announced after his departure. During his tenure, he negotiated an agreement for Yahoo to sell back half its stake to Alibaba in a deal valued at $7.1 billion. After taxes, the agreement netted Yahoo upwards of $4 billion. The deal also provided for Alibaba to make an upfront lump-sum royalty payment of $550 million to Yahoo for the use of Yahoo China and to continue to pay royalties for up to four years. Alibaba will license patents to Yahoo, and Yahoo will share tech with Alibaba.

The 2012 agreement required Yahoo to sell back half its shares when Alibaba goes public, but last fall Mayer struck a new deal with Alibaba that allows the company to hold on to more of its investment. When Alibaba goes public later this year, Yahoo will be required to sell 208 million shares, or roughly 40% of its holding.

Back to: Marissa’s moment of truth

This story is from the May 19, 2014 issue of Fortune.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.