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...
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.
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:
Follow me on Twitter @DavidGZeiler.
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