Yahoo's Payday From Alibaba's IPO Will Bring New Pressures

The company needs to fix its ad business as it hunts for deals
Photograph by David Paul Morris/Bloomberg

Thanks to a decade-old bet on Chinese e-commerce site Alibaba, creaky Yahoo! is about to get a big infusion of cash. Agreements between the two companies will force Yahoo to divest about four-tenths of its 24 percent stake at Alibaba’s upcoming initial public offering. At Alibaba’s current valuation, the sale could add as much as $10 billion to Yahoo’s coffers after taxes, double what the company had on hand at the end of 2013.

Yahoo’s challenge is to put that money to good use. The company, which declined to comment for this story, has become dependent on its Chinese investment to keep its stock price rising as it cedes market share in its core ad business to younger rivals Google and Facebook. Last year, Yahoo lost its No. 2 position in U.S. digital ad sales to Facebook for the first time, according to EMarketer. The research firm projected that Yahoo’s display ad business will grow 2 percent this year, compared with 24 percent for the U.S. digital ad market.

The company can’t afford to just hand its Alibaba windfall back to shareholders and chalk up a win. “To the vast majority of Silicon Valley, I think the future of Yahoo looks uncertain,” says Maha Ibrahim, general partner at venture capital firm Canaan Partners. “To truly transform the business, there’s going to have to be some big bets.”

Yahoo has announced more than three dozen acquisitions under Chief Executive Officer Marissa Mayer, ranging from news aggregators to makers of image-recognition software and mobile games. But most have been small—$35 million for an e-commerce analytics company here, $6.5 million for a mobile video startup there. In a field bubbly enough for Facebook to drop $19 billion on WhatsApp, Yahoo may need to spend a lot more if it wants to compete with consumer Web companies that are broadening their business.

The Alibaba IPO will give Yahoo the cash it needs to buy companies that can bring it more revenue than Tumblr or Summly have. BuzzFeed, Airbnb, and Uber are among the attainable sites with big followings, says Victor Anthony, an analyst at Topeka Capital Markets. Ibrahim recommends subscription-based streaming video and music services. Josh Goldman, a general partner at Norwest Venture Partners, points to online learning services, an area Google and Facebook haven’t yet taken over.

Google in particular has a lead over Yahoo in broader advertising sales, while Facebook has the edge in social media ads. Yahoo is “not necessarily top of mind” compared with Facebook, says Brian Yamada, executive director of channel activation at VML, part of the global advertising and public relations company WPP. “But,” he says, “they’ve made a lot of big strides.”

Mayer’s efforts to bolster content for the Yahoo home page, by hiring star reporters and licensing old Saturday Night Live episodes, have helped boost Yahoo’s monthly active users to more than 800 million, a 20 percent increase since she took over in 2012. Half of them are mobile users. The company’s shares have more than doubled since the beginning of last year.

Still, Yahoo’s own quarterly growth projections are around 1 percent or less, discounting ad revenue passed on to partner sites, and its ad prices are dipping. Mayer owes much of the stock’s strong performance to the investment in Alibaba and, to a lesser degree, Yahoo! Japan. After the Alibaba IPO, Yahoo will no longer be the best way for U.S. investors to get a piece of China’s leading e-commerce company. “At this point,” says Brett Harriss, an analyst for Gabelli, “what Yahoo needs to do is get their core business in order.”

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