Could Alibaba Grant Yahoo's Wish?

Jan.21.14 | About: Yahoo! Inc. (YHOO)

Alibaba and Yahoo

Alibaba's IPO is critical to the financial success of Yahoo (NASDAQ:YHOO). Under Yahoo's founder Jerry Yang, the company bought a 24% stake in Alibaba in 2005; as a result, Yahoo's shares skyrocketed 107% in 2013, due to Alibaba's valuation. The reason for Yahoo's sudden popularity is quite simple: Alibaba is huge. In one shopping day, site visits may hit 300 million, with an estimated 50 million purchases and as many as 158 million packages shipped. See our prior article on YHOO here and here.

How Big Will Alibaba's IPO Be?

Alibaba's IPO may be the biggest Internet IPO in 2014. The Chinese e-commerce firm has a larger sales volume than Amazon. According to RetailNet Group, Amazon made $86 billion 2012, while Alibaba made $160 billion. Alibaba's impending IPO may value the company at $150 billion - higher than the IPO of Google and Facebook. Underwriters on Wall Street can expect to make millions in fees.

Yahoo's Comeback

In 2011, investors did not think highly of Yahoo. Despite its large size and history of dominance in the early Internet years, Yahoo was overshadowed by Google and Facebook. Then came Marissa Mayer - a photogenic, smart, and bold executive, which generated new interest in the company.

Before Mayer's appointment, Yahoo was unpopular with investors, due to poor business decisions and strategic errors; however, it now appears like one of Yahoo's decisions, spending a billion dollars for 24% of Alibaba, may not have been a blunder after all. Analysts now think that decision has increased the value of Yahoo by at least $100 billion - possibly as much as $170 billion.

The Man Behind Alibaba's IPO

Although Joe Tsai, a middle-aged lawyer, is not the founder or chief executive of Alibaba (that honor belongs to Jack Ma), Tsai is the executive vice chairman in charge of the IPO. As a result of his powerful role, Tsai has suddenly become popular with Wall Street executives. According to many investment news sources, his phone is ringing off the hook with calls from top bankers like JPMorgan Chase, Goldman Sachs, and Morgan Stanley, among others.

The Taiwanese-born, Yale-educated lawyer is handling the pressure remarkably well. In an interview he spoke about the IPO as merely one milestone in the company's future.

In 1999, Mr. Tsai accepted an offer by Mr. Ma to join the company at a monthly salary of $50 a month. At that time, venture capitalists in Silicon Valley did not think Alibaba worthy of their time or money. The company appeared to be a good idea with no future. Prior to joining Alibaba, Mr. Tsai had worked as an associate for Sullivan & Cromwell and then as a private-equity investor for the company Investor, a Swedish investment firm.

A Ripple Effect?

A date for the IPO has not been determined, and the process has not been formally announced. (Mr. Tsai is managing to turn down the hype to keep the pending IPO from disrupting business.)

Despite the apparent calm, unmistakable excitement is brewing-with everyone calculating how much they will be worth after the event, from company employees, to connected CEOs like Marissa Mayer, to Wall Street bankers.

Many Opportunities For Investors

Investors should consider the positive possible effect Alibaba's IPO may have on Yahoo, Chinese tech companies, like Tencent, and underwriting firms. If Alibaba succeeds in its IPO, wishes could be granted for many.

Disclosure: I am long YHOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.