Aug. 10 (Bloomberg) -- Yahoo! Inc. executives are in talks to buy about 33 percent of Alibaba.com, China's biggest online retailer, for $1 billion in stock and cash, as it tries to win share in a market that's expected to increase threefold by 2007.

The Sunnyvale, California-based company has offered to swap 100 percent of its China subsidiary, valued at $1 billion, for a stake in Alibaba, according to a Yahoo executive, who asked not to be named. Alibaba would then take over the management of the China operation of Yahoo, the executive said.

The investment plan highlights moves by U.S. internet companies including Yahoo, Google Inc. and EBay Inc. to gain access to China's 100 million Internet users. About 35 million Chinese users are expected to buy and sell goods online by 2007, from 12 million in 2004, according to iResearch Inc., a Chinese Internet tracking firm.

``It's a very important strategic market, and they need to get a foothold there,'' said Anthony Valencia, an analyst in Los Angeles at TCW Group Inc., Yahoo's third-biggest institutional investor, with 57.8 million shares as of June. ``I'm in wait-and- see mode. There's definitely a huge market.''

Yahoo spokeswoman Joanna Stevens, at the company's Sunnyvale headquarters, declined to comment. Jack Ma, Alibaba's founder, chairman and chief executive, said he couldn't make any comments immediately.

``We'll issue a public statement soon,'' Ma said in a telephone interview. ``We see a lot of rumors out there and we want to make clarifications.''

The purchase would be the biggest by a foreign company in China's Internet industry, according to Forbes, which reported the talks on Aug. 7.

Biggest Market

Alibaba.com, founded in 1999 and based in Hangzhou, 120 miles south of Shanghai, runs three online trading Web sites that have more than 14 million users. The sites help small- and medium-sized businesses in China exchange goods and export products to international markets.

Alibaba also owns AliPay, a service similar to EBay's PayPal that allows individuals and businesses to send and receive payments online. The company has more than 2,000 employees.

EBay, the largest Web marketplace, is investing up to $100 million in China this year and the country may become its largest market in five to 10 years, said spokesman Hani Durzy. He declined to comment on Yahoo's plans in the country.

``Yahoo needs to expand its presence in China,'' said Safa Rashtchy, an analyst with Piper Jaffray & Co. in Menlo Park, California. ``Alibaba has a pretty major presence.''

Snags

A stake in Alibaba would also allow Yahoo to tap the growth of Taobao.com, Alibaba's auction Web site for consumers, which analysts say has outperformed Yahoo's own auction venture in the country. Yahoo today provides online auctions through a site called 1pai.com.cn, created through a venture announced in 2004 with Sina Corp., a Chinese Internet site.

``That joint venture has not lived up to the expectations of a lot of Yahoo's managers,'' said Scott Kessler, an analyst with Standard & Poor's in New York. ``They feel an increasing sense of urgency relative to the Chinese auction market.''

He rates Yahoo shares a ``buy'' and doesn't own them.

The proposed transaction, which has been under discussion since early July, has hit snags as Alibaba executives are concerned about losing control of their company, said Edward Yu, chief executive of Beijing-based technology research firm Analysys International, citing ``insiders of both companies.''

``The main obstacle is Alibaba fears it would be controlled by Yahoo in the U.S.,'' Yu said. Ma, Alibaba's chief executive, would take over Yahoo China's daily operations, according to Yu.

Yahoo's primary assets in China are its mail messenger service and its market-leading ``3721'' Chinese word search engine. In addition, Yahoo has launched new products including Yisou.com, a search engine that competes with Baidu.com Inc.

Google owns about 2.6 percent of Baidu, which has surged about fourfold since its Aug. 4 debut on the Nasdaq Stock Market.

Outgoing President

Zhou Hongyi, president of Yahoo! Inc. China, who has announced that he's leaving the company on Aug. 31 to pursue a career in venture capital, said this week that he believes a transaction is unlikely. Alibaba has its own business-to-business and consumer-to-consumer revenue models, and Yahoo is strong in search engines and emails, he said Aug. 8.

Zhou, who founded Chinese keyword search engine 3721 Network Software Co., sold the company to Yahoo in November 2003 for as much as $123 million.

Online transactions in China are expected to rise to 21 billion yuan ($2.59 million) in 2007, from 3.4 billion yuan today, according to iResearch. China had about 94 million Web users in January, Piper Jaffray's Rashtchy said in a July 8 note.

To contact the reporter on this story: Allen T. Cheng in Beijing at Acheng13@bloomberg.net

Last Updated: August 10, 2005 01:52 EDT