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Yahoo holds 40 percent of Alibaba

Shares of Alibaba, where Yahoo holds a 40 percent stake, dropped nearly 5 percent on the Hong Kong market with the collapse of Yahoo's deal with Microsoft.

Anticipation of a big gain with Microsoft's interest in Yahoo turned to disappointment for investors in major Chinese online player Alibaba. Jack Ma's company saw shares fall 4.7 percent after Microsoft CEO Steve Ballmer declared takeover negotiations at an end with Yahoo.

One Hong Kong analyst said in Reuters that shareholders were bailing out fast. "Investors had been buying this stock on hopes that Microsoft will buy into Yahoo but with the acquisition failing to materialize, disappointed investors are dumping shares," said Ben Kwong, chief operating officer at KGI Asia Ltd.

Another analyst said the end of the takeover won't hurt Alibaba long term. "The news may have affected sentiment but has very little to do with what the company can do in terms of earnings," said Francis Cheung, analyst at CLSA.

Alibaba enjoyed a rush of interest with Microsoft's pursuit of Yahoo. Shares rose significantly as speculators awaited a sweeter deal from Microsoft, just as they did with Yahoo when Microsoft first made public its interest in acquiring the iconic Internet portal.

US industry observers expect a drop in Yahoo's price on Wall Street as well. After hours trading already knocked over 20 percent of Yahoo's market cap off the business, and it could go lower if investors opt not to believe Yahoo CEO Jerry Yang's optimistic outlook and two-year plan for his business.