Yahoo! Inc. (Nasdaq: YHOO) Chief Executive Officer Marissa Mayer has some big decisions on her plate now that the long-awaited Alibaba IPO (NYSE: BABA) is here and the stock starts trading tomorrow (Friday).
Yahoo figures to get a massive windfall from its 22.5% stake in the Chinese e-commerce giant, thanks to a prescient $1 billion investment the Sunnyvale, Calif.-based Internet pioneer made in 2005.
The Alibaba investment has been a rare bright spot for a company that has lost its way in recent years - earnings have continued to spiral downward - but Mayer will need to spend it wisely to turn Yahoo's fortunes around.
"Alibaba is giving rocket fuel to Yahoo, but the problem is Yahoo still has to develop the engines," Trip Chowdhry of Global Equities Research told Agence France-Presse.
With the Alibaba IPO likely to be priced at around $68 a share, Yahoo's stake will be worth about $35.6 billion.
Yahoo is expected to sell 140 million of its 523 million Alibaba shares, which at $68 will generate $9.52 billion, half of which the company plans to return to YHOO shareholders in the form of a one-time dividend.
After taxes, that will inject about $3 billion into Yahoo's balance sheet, more than doubling the company's cash.
While the Alibaba stake has beefed up YHOO's valuation and bought time for Mayer to develop a turnaround strategy, the arrival of the Alibaba IPO changes the dynamics.
Yahoo investors have been factoring in the Alibaba IPO payoff - YHOO stock has popped 180% since Mayer assumed the CEO post in 2012 and is up 20% over the past three months - but now will be closely watching what Mayer does with the windfall as they decide whether to hold or sell their shares.
Mayer has the usual slate of choices - she could buy back Yahoo stock, initiate a dividend, invest in the company, or spend the money on acquisitions.
Since Yahoo needs to find growth to have any hope of avoiding a slow slide into irrelevance, look for Mayer to focus on the latter two options.
While $3 billion isn't a huge number in the tech universe, it's important to keep in mind that Yahoo's war chest will get a much bigger Alibaba-fueled boost a year from now...
More Alibaba IPO Cash Is on the Way
Yahoo can't sell its remaining 16.3% stake until one year after the Alibaba IPO, but that's not a terribly long time. And given the extraordinary interest in Alibaba stock, that stake could be worth much more a year from now.
Many believe Yahoo is working on a plan to try to extract as much cash as possible from the remaining stake, which will probably entail some sort of tax minimization scheme.
If BABA is trading at $70 a share, Yahoo's remaining stake would be worth $27 billion; at $80 a share it would be worth more than $30 billion. That kind of money, even after taxes, would make much bigger acquisitions possible.
Mayer is lucky to have such money fall into her lap, but she needs to do a better job of finding quality acquisitions.
"So far her M&A has not been effective. When she came into the company it was generating $1.7 billion of EBITA, she spent $2 billion on acquisitions and now the company is going to generate $1.2 billion. It seems like its destroyed value," Brett Harriss, an analyst at Gabelli & Co., told The Independent.
Nevertheless, this double infusion of Alibaba IPO money opens up intriguing acquisition possibilities for Yahoo over the next few years.
How Yahoo Might Spend Its Alibaba IPO Cash
During her two-plus years as CEO, Mayer has made about 40 acquisitions, including spending $1.1 billion for Tumblr last year.
If she follows the pattern of those acquisitions, she'll be looking for companies that can help Yahoo in the areas of search, communications, digital magazines, and video.
Some of the top prospects include:
- Yelp, Inc. (NYSE: YELP): With a valuation of $5.46 billion, buying Yelp would be a stretch in the short term, although the second wave of Alibaba cash would make this doable. Rumors have floated for months that Yahoo would like to buy Yelp, and the two forged a partnership back in February. Yelp would bring user-generated content to Yahoo, something the company is known to want more of.
- Various ad tech companies: Yahoo has been struggling to increase its advertising revenue - its core business - and a smart acquisition in this space might make the difference. Two possibilities include Rubicon Technology Inc. (Nasdaq: RBCN), which has a market cap of $131 million, and Millennial Media, Inc. (NYSE: MM), which has a market cap of $207 million. But the best bet here is the French-based Criteo SA (Nasdaq: ADR: CRTO), which was rumored to be on Mayer's acquisition radar last year. Criteo has a market cap of $1.94 billion.
- Pinterest: The online scrapbooking social media website, where a loyal fan base shares images of things they like, has tons of commercial potential. And Pinterest is currently building a search platform that will make the site even more valuable. Pinterest has an estimated valuation of about $5 billion, but the reward in this case outweighs the risk.
- Quora: Like Yelp, Quora would provider user-generated content, but Quora does it in the form of questions and answers about virtually any topic. The company generates no revenue, but has plans to start monetizing its content next year. It has an estimated valuation of about $900 million.
- StockTwits: One of Yahoo's strengths is its news, and Yahoo Finance in particular. StockTwits, as its name suggests, consists of users commenting in real time on stocks in brief, Twitter-like text messages. Yahoo and StockTwits already are partners, with the site pulling its financial data from Yahoo Finance. The company is still relatively small, and could probably be had for about $100 million.
Follow me on Twitter @DavidGZeiler.
UP NEXT: That the Alibaba IPO could well turn out to be Yahoo's salvation is a bit ironic considering that a decade ago the two companies were rivals. And even after Yahoo bought that big stake in Alibaba, the relationship was often a rocky one. Here's the story of one of the more extraordinary partnerships in tech...
Related Articles:
- The Street: Yahoo!'s Alibaba Cash Could Trigger a Buying Binge in Tech
- Agence France-Presse: Yahoo Gets a Fresh Lease of Life with Alibaba IPO
- The Independent: Alibaba IPO: Yahoo's Marissa Mayer in the Spotlight as Chinese Giant Goes Public
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.