Yahoo Chief can’t work Alibaba’s magic for long

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Yahoo chief executive officer Marissa Mayer, who has overseen an almost 150% stock rally fueled by her company’s stake in Alibaba Group Holding, is poised to pare that ownership – a move that threatens to diminish the US web portal’s investor appeal. About $21 of Yahoo’s $39 share price comes from the company’s stake of about 24% 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 US – Yahoo has agreed to sell as much as 40% 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 and Facebook. “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 California-based Yahoo, declined to comment, as did Ashley Zandy, a spokeswoman for Alibaba.

Selling as much as 40% of its Alibaba stake has some benefits for Yahoo. It could yield the web portal more than $6 billion, according to JMP Group, 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.

Less dependence
Mayer will have to cut her dependence on Alibaba. 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.

Yahoo and Alibaba’s connections go back to a 2005 deal when the web portal acquired about a 40% 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, based on market cap

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