Bloomberg News

Yahoo Paring Alibaba Stake Pressures Mayer to Bolster Ads

March 19, 2014

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Yahoo! President and CEO Marissa Mayer. Photographer: Ethan Miller/Getty Images

Yahoo! Inc. (YHOO:US) Chief Executive Officer Marissa Mayer, who has overseen an almost 150 percent stock rally fueled by her company’s stake in Alibaba Group Holding Ltd., is poised to pare that ownership -- a move that threatens to diminish the U.S. Web portal’s investor appeal.

About $21 of Yahoo’s $39 share price comes from the company’s stake of about 24 percent in Alibaba, according to Youssef Squali, an analyst at Cantor Fitzgerald. After Alibaba goes public -- it said on March 16 that it has decided to start the process in the U.S. -- Yahoo has agreed to sell as much as 40 percent of its piece of the e-commerce company, with the remaining shares to be unloaded at its discretion.

That puts pressure on Mayer, who painstakingly improved Yahoo’s relationship with Alibaba and was rewarded when investors piled into her company’s stock as a proxy for the Chinese firm. The Alibaba investment helped mask Yahoo’s weakness in online advertising, where sales have declined or stayed flat for the past four quarters. Investors are now more closely scrutinizing whether Mayer can restart advertising growth to close the gap with Google Inc. and Facebook Inc.

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“She can’t hide behind Alibaba anymore,” said Squali, who has a buy rating on the shares. “She’s going to have to step up.”

Wooing Advertisers

Mayer is already bolstering efforts around Yahoo’s online-ad business, after initially focusing on users. In January, she fired Chief Operating Officer Henrique de Castro following tensions between the two, people with knowledge of the situation have said. She then reshuffled executives so she would have more direct access to leaders on the advertising team. Earlier this week, Mayer appeared at a key ad-agency conference in Los Angeles for the first time to tout new marketing tools and user engagement.

“There’s a lot of opportunity,” Mayer told the packed room at the Beverly Hilton Hotel during the event. She later said, “There’s almost nothing as creative as advertising.”

Sarah Meron, a spokeswoman for Sunnyvale, California-based Yahoo, declined to comment, as did Ashley Zandy, a spokeswoman for Alibaba.

Selling as much as 40 percent of its Alibaba stake has some benefits for Yahoo. It could yield the Web portal more than $6 billion, according to JMP Group Inc., which would double the company’s cash holdings. Yahoo, which has snapped up companies under Mayer, has said it will try to use its capital efficiently as it examines stock buybacks, acquisitions and the balance sheet.

Smooth Relationship

Mayer is having to reduce her dependence on Alibaba after she worked to improve the interactions between Yahoo and the Hangzhou-based company. Since becoming Yahoo CEO in July 2012, Mayer has publicly complimented Alibaba founder Jack Ma and executive Joe Tsai. She also appointed her head of development, Jacqueline Reses, to be Yahoo’s ambassador to Alibaba. The moves buoyed a connection that had soured under previous Yahoo CEOs.

“The relationship is much, much better, much more collaborative,” Yahoo Chief Financial Officer Ken Goldman said at a conference hosted by Bank of America Merrill Lynch last June. “Our company has got the benefit of the valuation upturn.”

Yahoo and Alibaba’s connections go back to a 2005 deal when the Web portal acquired about a 40 percent piece of the Chinese company for $1 billion and let Alibaba take over Yahoo’s operations in that country. Investment banks now value Alibaba at as much as $200 billion, which would make it the second-biggest Internet company, behind Google (GOOG:US), based on market capitalization.

Yang, Ma

Yahoo’s relationship with Alibaba was fostered by Yahoo co-founder Jerry Yang and Ma. Under former Yahoo CEO Carol Bartz, who took the helm in early 2009, communications deteriorated. In January 2010, Alibaba described Yahoo’s support for Google, which was tangling with Chinese authorities after an attack on its computer system, as “reckless.”

The rift widened in 2011 after Bartz complained that the Chinese company was spinning off online-payment business Alipay without consulting or informing shareholders.

In 2011, Bartz was forced out of Yahoo. That led to a key agreement in May 2012, when Yahoo CFO Tim Morse and interim CEO Ross Levinsohn struck a deal for the e-commerce company to repurchase almost half of Yahoo’s stake. That gave Alibaba more of the equity it wanted and helped monetize Yahoo’s holdings. Ma called it a “new chapter” in the relationship.

Building Up

Mayer began as Yahoo CEO two months later and wasted little time continuing the thaw. She tapped Reses to take over the seat on Alibaba’s board by late 2012, replacing Morse, who left Yahoo. Reses made at least one trip to China to meet with the board last year, Mayer said.

“We really enjoy the management of Alibaba,” Mayer said at a Goldman Sachs Group Inc. investor conference in February 2012. Ma and Tsai “are terrific,” she said.

In September, Reses voiced support for Alibaba’s management structure, which is set up in a way that enhances executives’ voting power. That had become a source of concern in Hong Kong as the company explored a potential listing there.

“As one of Alibaba’s largest shareholders, Yahoo believes that management’s efforts reflect the desire to govern the company for long-term success while also balancing the rights of shareholders,” Reses said in a prepared statement.

Hanging On

The following month, Yahoo unveiled a new agreement with Alibaba that reduced the maximum number of shares it is required to sell in an IPO by 20 percent. That lets Yahoo hang onto more Alibaba shares so it can better participate in any upside in the company’s valuation following an IPO.

“Under its new leadership, Yahoo has made it a priority to build a good relationship with Alibaba,” Tsai said at the time. “We look forward to working with Yahoo as a supportive shareholder and partner to expand our business for future growth.”

Even with Yahoo set to reduce its dependence on Alibaba, Daniel Morgan, senior portfolio manager at Synovus Trust, which owns shares of Yahoo, said he is prepared to wait to see how Mayer handles the core business. The CEO should have at least four years to show she can deliver a turnaround, given the company has too many challenges to make a judgment now, he said.

“This is something that really needs re-engineering,” Morgan said.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Jillian Ward


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Companies Mentioned

  • YHOO
    (Yahoo! Inc)
    • $43.5 USD
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    (Google Inc)
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