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Alibaba IPO will expose Yahoo's weaknessesThomas LeeUpdated 7:02 am, Wednesday, March 26, 2014

Yahoo's stake in Alibaba could earn it $10 billion when the Chinese e-commerce giant goes public. Photo:Uncredited, Associated Press

It would be extremely difficult to imagine the

downside of getting $10 billion in cash from

what will likely be the most lucrative tech

IPO ever.

But look beyond Yahoo Inc.'s immediate

payday from its 24 percent stake in Chinese

e-commerce giant Alibaba, and things aren't

so rosy. Stripping away Alibaba reveals a core

advertising business that continues to struggle

despite the best efforts of CEO Marissa Mayer,

whom Yahoo hired away from Google two

years ago.

Mayer deserves a lot of credit for making

Yahoo somewhat relevant again. She bought

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Alibaba IPO will expose Yahoo's weaknesses - SFGate http://www.sfgate.com/technology/article/Alibaba...

1 of 4 03/27/2014 04:10 PM

Tumblr and brought in top talent like Katie Couric and former New York Times tech

columnist David Pogue.

But Mayer made a critical mistake early in her tenure: She should have immediately sold

Yahoo's stake in Alibaba.

On the surface, that sounds incredibly stupid. Sell off Yahoo's most valuable asset prior to

the hottest initial public offering of all time? But that's exactly the problem - Alibaba is

Yahoo's most valuable asset. Holding it may have propped up Yahoo's stock for two years,

but it artificially masked the company's weak U.S. ad business, making Mayer's job all the

more difficult once Alibaba goes public.

"There are no signs of a turnaround in the core business, despite two years under Marissa

Mayer," said Mark Mahaney, a tech analyst with RBC Capital Markets in San Francisco.

"There has been no growth in cash flow over the past five years, which is a pretty

impressive non-achievement.

"The company until now has been buffeted by the perceived value of Yahoo's assets in

Asia," he said. "Plus, the market has given Marissa some leeway as the new CEO. But there

will be some pressure on her" after Alibaba becomes a public stock.

It would have hurt less if Mayer had ripped off the Alibaba Band-Aid quickly as opposed to

a long painful peel. Yes, Yahoo would have been worth far less two years ago, but at least

Mayer could clearly present her case to investors: This is Yahoo, warts and all. Take it or

leave it.

Perhaps Mayer thought she could afford to sit on the Alibaba investment because she had

planned to show demonstrable progress on Yahoo by now. Under her tenure, the company

has bought several startups, recruited new talent, redesigned Yahoo's home page and

e-mail, and invested heavily in video and mobile ads.

But for all its frenetic energy, Yahoo still primarily depends on display ads and continues

to lag behind Google. The company has not yet figured out to convert its sizable audience,

drawn to Yahoo Sports and services like e-mail and finance, into dollars and cents. For

fiscal 2013, Yahoo's revenue from continuing operations declined slightly to $4.4 billion.

"We have made a lot of progress," Chief Financial Officer Ken Goldman recently told

investors attending the JPMorgan conference in San Francisco. "We are seeing some

stability in the revenues. We really haven't grown revenues, obviously, like we would have

liked. We are very, very focused on that. ... We obviously have some work to still do on

display ads, and we are working on that."

Wall Street has largely shrugged off Mayer's efforts. By some estimates, Yahoo without

Alibaba is worth only 12 percent of its current market value of $36 billion.

Yahoo probably will retain some ownership of Alibaba after the IPO. But some analysts

suspect that Alibaba, whose sales growth has slowed of late, is widely overvalued, perhaps

reflecting the bubble-like nature of the Chinese economy. Plus, Chinese tech stocks are not

exactly slam dunks (remember Renren?).

To be fair, analysts said Yahoo would always be a long-term fixer-upper, perhaps a three-

or four-year job. And thanks to Alibaba's IPO, Yahoo will have considerable financial

firepower to buy companies and invest in its businesses. Yahoo also still boasts $1.5 billion

in cash flow, not an insignificant amount.

But without the protective shroud of Alibaba, Yahoo is naked and exposed.

Thomas Lee is a business editor and columnist at The San Francisco Chronicle. E-mail:

[email protected]. Twitter: @ByTomLee

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