Yahoo has agreed to sell half of its 40 per cent stake in Alibaba for about $7.1 billion.
The deal, announced today in the US, will see Chinese e-commerce group Alibaba buying back the stake from Yahoo for $6.3 billion cash and up to $800 million of Alibaba preference shares.
The announcement caps at least a year of on-and-off talks as Yahoo tried to sell its stake.
Money from the sale might help Yahoo appease its shareholders by giving it the ability to pay dividends, make acquisitions or buy back its own shares.
The two companies also have an agreement for Yahoo to sell the remainder of its Alibaba stake in stages later on.
Yahoo's interim chief executive Ross Levinsohn said in a statement that the agreement provides "clarity" for Yahoo shareholders.
A person with knowledge of the deal said there are incentives built into the transaction that would make it attractive for Alibaba Group to hold an initial public offering by the end of 2015.