Thanks to a decade-old bet on Chinese e-commerce site Alibaba, creaky Yahoo!(YHOO) 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 rivalsGoogle (GOOG) and Facebook (FB). 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 companyWPP (WPPGY). “But,” he says, “they’ve made a lot of big strides.”
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