Yahoo CEO Marissa Mayer will face a $10 billion decision in a few months. She already has made many changes since taking over nearly two years ago, but all the internal reshuffling and deal-making has merely been a prelude to her biggest test.
The pivotal moment in Mayer's tenure will come after Alibaba Group, China's e-commerce leader, completes one of the biggest initial public offerings of stock in U.S. history. The IPO triggers a provision requiring Yahoo Inc. to sell about 40 percent of its stake in Alibaba. The sale is expected to generate a major windfall that will intensify the 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 imminent 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 Alibaba's IPO is completed, likely sometime in August or September.
Although Alibaba probably won't set an IPO price for its stock 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.
A more logical takeover candidate for Yahoo would be AOL Inc., another once-imposing Internet company that was outwitted by hard-charging innovators such as Google and Facebook that built lucrative advertising networks around dominant 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 also 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 ultimately make more money by eliminating overlapping jobs and operations.
A potential purchase of AOL got significantly cheaper Wednesday after the company's first-quarter earnings missed analysts' projections. AOL's stock plunged 21 percent, leaving the company with a market value of about $2.8 billion.
There's another reason a deal could come together: Mayer and AOL CEO Tim Armstrong have known each other for years, having both played key roles in Google's success while working at that company. Armstrong specialized in ad sales while Mayer focused more on design and engineering.
While he thinks an AOL acquisition could work for Yahoo, Cohen believes many investors are unnerved by the prospect of Mayer financing a shopping spree with the Alibaba windfall.
Through last year, Yahoo had purchased a total of 28 companies for a combined $1.4 billion since Mayer became CEO. Most of the deals consisted of tiny startups staffed by engineers who Mayer wanted to hire for their expertise in mobile applications. The one exception: a $1.1 billion purchase of blogging service Tumblr.
"She has been making acquisitions that haven't been producing revenue," Cohen says. "If she goes for even bigger acquisitions, the stakes will be even higher and the market's confidence in her is not that strong right now. The market is worried the value from Alibaba could be destroyed."
Yahoo's stock sank $2.42, or 6.6 percent, to close at $34.07 on Wednesday. The shares stood at $15.65 when Mayer became Yahoo's CEO in July 2012.
"From a shareholder perspective, the big issue is what is going to happen to all that cash," says Macquarie analyst Ben Schachter. "People want to know and she is being relatively coy about it. So there is a lot of uncertainty around Yahoo right now."
In her appearance at the TechCrunch, Mayer indicated that she would handle the upcoming Alibaba windfall similar to the way she dealt with Yahoo's more than $7 billion gain after selling another portion of its stake in the Chinese company in 2012: She set aside some of the money for acquisitions, but earmarked about 85 percent of it for buying back its own stock, based on Schachter's calculations.
"We intend to be good stewards of the capital," Mayer said.
If Mayer doesn't live up to her word and investors flee, Yahoo could become a takeover target.
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