China’s Alibaba Group Holding Ltd (阿里巴巴) is set to star on Wall Street with its upcoming initial public offering (IPO), but US-based Yahoo Inc is also to get a windfall, which might help efforts to revamp the fading Internet pioneer.
Yahoo bought a 40 percent stake in the Chinese online giant in 2005 for US$1 billion and still holds 22.4 percent of Alibaba. Yahoo is expected to walk away with US$7 billion to US$9 billion by paring that stake down to 16.3 percent.
The huge Alibaba IPO comes as Yahoo seeks a new direction under chief executive officer Marissa Mayer, who took the reins in 2012 in an effort to redefine the company’s mission after it took a back seat to Google Inc and others. Analysts say the cash offers Yahoo an opportunity, but that it needs to use it productively.
“Alibaba is giving rocket fuel to Yahoo, but the problem is Yahoo still has to develop the engines,” Global Equities Research LLC co-founder Trip Chowdhry said.
In July, Yahoo said the majority of the proceeds of the sale of its stake in Alibaba would be returned to shareholders. The remainder could help fuel acquisitions to help Yahoo boost its sagging revenue base, after a 4 percent year-on-year drop in the latest quarter.
Mayer has been on a buying spree, which has included the blogging platform Tumblr last year for US$1.1 billion which was aimed at drawing in younger Internet users.
Chowdhry said Yahoo should also use some of the cash to “innovate” and improve some of its existing services, such as Yahoo Mail and Yahoo Finance, Web hosting and services for small business.
However, it is unclear if Yahoo would be able to wow its users and investors with products and services like others in the sector such as Apple Inc or Google.
Mayer has been moving Yahoo toward more online video, with plans to produce its own entertainment programs to go along with news and music, but has not been able to challenge Google-owned YouTube.
In addition to winning over consumers, Yahoo must restore confidence in its investors.
Yahoo’s market value has nearly tripled in the past two years to about US$42.6 billion — but analysts say that much of that value is from its investment in Alibaba, worth between US$31 billion and US$34.6 billion. Some investors might have used Yahoo as a proxy for Alibaba and now might cash out.
“I wonder if investors will sell Yahoo to buy Alibaba directly,” Meeschaert Capital Markets president Gregori Volokhine said. “Or will they keep their Yahoo shares to benefit from any appreciation of Alibaba? It’s not clear.”
Another possibility being talked about is Alibaba — whose market value could be as much as US$200 billion — simply swallowing up Yahoo, if the US firm fails to return to growth.
Yahoo rejected a takeover a few years ago from Microsoft, but since then its fortunes have sagged and it has fallen behind rivals in key areas such as online advertising.
Alibaba could invest a lot of cash in Yahoo and could use it as a way to enter the difficult US market, and its IPO is expected to raise a record amount for a tech company in the US, possibly as much as US$24 billion.
Chowdhry said it is unlikely that Yahoo would be sold to a Chinese firm because of “the perception that there is a lot of censorship and government control on Internet companies in China.”
“I don’t think the [US] regulatory agencies will allow Alibaba to acquire Yahoo,” he added.
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