In A Post-Alibaba IPO World, Marissa Mayer’s Yahoo Honeymoon Is Definitely Over

We’re on the eve of what many could describe as the biggest IPO in history. Chinese e-commerce service Alibaba is gearing up to go public and it’s expected to on Friday in a move that analysts predict will see the company raising $24.3 billion. That amount alone propels Alibaba to the upper echelons of the public companies with the biggest value, easily trumping Visa’s $19.65 billion IPO in 2008. But we’re not here to analyze Alibaba’s public offering. Rather, we’re here to look at one of the beneficiaries of it: Yahoo.

The owner of 22.6 percent of Alibaba’s stock, Yahoo stands to make billions off of the IPO — considerably much more than the $7.6 billion that it received two years ago when it sold 40 percent of its stake in the e-commerce firm. For a moment, let’s do the math: if Alibaba’s stock initially remained at the initial high price of $66 per share, with 523,565,416 shares, Yahoo stands to make $34.5 billion — and it’s believed that the initial price could go as high as $68, which equates to $35.6 billion. That being said, now that Yahoo is going to make a pretty penny, it could be said that the Sunnyvale-based company’s “honeymoon” is over. It needs to show some definitive results.

Marissa Mayer’s gamble

It was over two years ago when Yahoo made a decision that certainly reverberated throughout Silicon Valley. After years of unsuccessful CEOs, the iconic company brought on board former Google executive Marissa Mayer to right its proverbially sinking ship. But instead of having a leader that sought to attract advertisers and make numerous layoffs and cost-cutting measures, it elected for someone who understood engineering, product, and startups.

And for all intents and purposes, Mayer’s strategy appears to be working to bring prestige back to the nearly 25 year-old company. And her impact was immediately felt by shareholders as the stock price has risen 167 percent since she took control of Yahoo (as of Sept 18, 2014 closing price). Just looking at the company’s stock history illustrates how impressed stockholders are and Mayer hasn’t shied away from touting the achievements Yahoo has made under her leadership.

Here’s a graph that shows the stock price increase since Mayer took over as CEO. Yes, there are some ups and downs, but the general pattern is upward. Its market valuation has also grown from $19.6 billion to $41.86 billion, a 113.6 percent increase. Of course, I’d be remiss to think that this was solely attributed to Mayer’s stewardship.

And another thing that’s been noticed is Yahoo’s hunger for acquisitions — within the past two years, the company has made deals with over two dozen companies, sometimes for billions of dollars (looking at you Tumblr). Granted some acquisitions were more for talent than product, but just what is Mayer’s long-term strategy for the company? What ingenious plan has she devised that integrates all of the companies that have been gobbled up by the Yahoo machine?

People are wondering how all of this will come together.

Spend, spend, spend

In a joint partnership endeavor, Yahoo purchased a 40 percent stake in Alibaba back in 2005 as a way to help the e-commerce company combat the dominance of eBay in China. That was for $1 billion. In 2012, Alibaba received nearly half of it back in exchange for $7.6 billion. Yahoo took the cash and in the past couple of years, has splurged it on various companies in an effort to realize a vision that Mayer has. In a Vogue article last August, she spoke about investing heavily in the mobile scene:

“Close your eyes and listen to this list: E-mail, maps, weather, news, stock quotes, share photos, group communication, sports scores, games. You’re listening to what people do on their mobile phones. And it sounds like a list of what Yahoo does.”

Much of the strategy has been made to convert Yahoo into this mobile company, including making acquisitions that some questioned, including Tumblr, GhostBird Software, Bignoggins Productions, Qwiki, IQ Engines, Bread, Aviate, Tomfoolery, Blink, and dozens more. And over and over again, Mayer never missed a beat reinforcing the mobile strategy — during Yahoo’s Q3 FY2014 earnings call, she said the company needed to do a better job at bringing its content to the mobile audience.

And investors appear to have been cutting Yahoo a bit of slack, especially since the company eventually started seeing 800 million monthly active users across mobile, mail, and search. And it was a rather unorthodox plan for the company — previous leaders like Carol Bartz, Scott Thompson, and Tim Morse all saw a need to appeal to advertisers — after all, they were Yahoo’s bread and butter. Market shares in search were rather dismal compared to Google and Microsoft had a pretty big deal with Yahoo. But in the Mayer administration, Yahoo moved away from that thinking to focus on products and mobile was the way for a rejuvenated company.

In the past few quarters, Yahoo has done pretty well, beating earnings with the exception of the one from Q2 FY2014 where revenue growth wasn’t where it should have been. Shareholders  have been taken on such a ride with Mayer that they wanted to see results from all of these acquisitions she was making. And she delivered, for the most part: quarterly earnings were fairly decent, user acquisition was positive, Yahoo was bringing back former employees, and more. It was becoming the company that it was years ago…and of course, everyone was waiting for Alibaba.

Back to reality

The fact that billions of dollars were expected from the Alibaba IPO probably kept people optimistic about Yahoo’s future. But what was unknown was when Alibaba would go forward with it. So it would seem that Yahoo had been given this two-year grace period to let Mayer’s team do whatever it want and were content to know that Yahoo hadn’t gone belly up. But starting Friday, the honeymoon is over: it’s time for Mayer to figure out what to do with the expected billions that her company will receive and to help the world see her vision.

So what could Yahoo do with an estimated $35.6 billion from the Alibaba IPO? Well could it give money back to its shareholders in the form of a dividend? That would be similar to what it did back in 2012 after its first divestiture, returning $3.65 billion in after-tax proceeds, or 85 percent of what it made on the deal. Or, we might start to see a second wave of acquisitions by the Sunnyvale-based company. What could it buy? Remember, Mayer’s vision is all about creating great mobile products to help people manage their every day lives…so perhaps it’s to establish a video social network (a la YouTube), pick up Foursquare (which has been long-rumored, but lacks substance), or perhaps grab another news service or photo app. The possibilities are surely endless.

Whatever the company’s next move is in a post-Alibaba IPO world, stockholders may be watching more closely, scrutinizing every step. No longer is there any so-called safety net that Yahoo can rely on to help offset any losses it takes. It’s time to play the game for real and the question is whether or not Yahoo…and Mayer…can stand up against the pressure and show that it can stand up on its own two legs to survive.

Photo credit: Alibaba and Yahoo webpages via Bloomberg; stock market photo via AP Photo/Itsuo Inouye