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Windfall means 'moment of reckoning' for Yahoo CEO

Published on NewsOK Modified: May 7, 2014 at 7:26 pm •  Published: May 7, 2014
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SAN FRANCISCO (AP) — Yahoo CEO Marissa Mayer faces a $10 billion decision in a few months.

The pivotal moment will come when the Chinese e-commerce leader Alibaba Group completes its initial public offering of stock — an enormous deal that triggers a provision requiring Yahoo to sell about 40 percent of its stake in the company. The sale is expected to generate a windfall that will intensify pressure on Mayer to revive Yahoo's revenue growth after years of lethargy.

"This is Marissa's moment of reckoning," says Moshe Cohen, a Columbia University business professor who has been tracking Yahoo's ties with Alibaba.

Mayer acknowledged as much Wednesday during an appearance in New York at a conference hosted by TechCrunch.

"We know this is of critical importance to our investors," she said. She declined to say much more, citing securities regulations that restrict the public comments of executives involved in pending IPOs.

While the sale of Alibaba stock will be a short-term boon for Yahoo, it will also remove some of the financial scaffolding that has been lifting Yahoo's stock even as the company's revenue continues to slip. Most analysts say the Alibaba stake is the main reason that Yahoo's stock has more than doubled under Mayer because investors latched on to Yahoo shares as a way to get a piece of Alibaba's IPO.

With much of the Alibaba support going away, "it's time to rev up revenue growth," says BGC Financial analyst Colin Gillis. "They will need to move the needle now."

One of the quickest ways Mayer could boost revenue would be to buy another company, something she will be in a better position to do after the IPO is complete, probably in August or September.

Although Alibaba is unlikely to set an IPO price until this summer, analysts estimate the Chinese company's market value at $150 billion to $200 billion. At that level, the 208 million shares that Yahoo is required to sell will bring in at least $10 billion. The Sunnyvale, California, company would still own about 315 million Alibaba shares that it could sell at a later date.

With that much money coming in, Mayer could afford to make a big splash by buying a hot startup such as rising social media star Pinterest or the ephemeral messaging service Snapchat. But those startups still aren't generating much revenue, an issue that would probably rattle investors if Yahoo dared to buy them. What's more, Yahoo could face competition from even richer bidders such as Google Inc. and Facebook Inc.

A more logical takeover candidate for Yahoo would be AOL Inc., another once-dominant Internet company that was outwitted by hard-charging innovators such as Google and Facebook, which built lucrative advertising networks around online franchises.

Gillis thinks the marriage could make sense for Yahoo because AOL has been more successful in online video — one of Mayer's top priorities — and has done a better job selling ads to other websites. AOL also has a long-running contract to get its search results from Google, an arrangement that might appeal to Mayer because she has publicly expressed disappointment with the revenue that Yahoo has been getting from a similar search deal with Microsoft Corp. If they were combined, Yahoo and AOL also could reduce expenses and make more money by eliminating overlapping jobs and operations.

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