The stage is set for Yahoo (NASDAQ:YHOO) CEO, Marissa Mayer to reveal the following three variables to the market prior to Alibaba's IPO this fall:
1- Being a mid-tier internet advertising company isn't in her best interests. Let Twitter (NYSE:TWTR) do it. Let Facebook (NASDAQ:FB) do it. Let Google (GOOG, GOOGL) do it. Despite Wall Street's enthusiasm for social and mobile, there remains a fixed amount of ad dollars allocated to online distribution channels. For three years, Marissa has scratched and clawed her way to increased user traffic, but revenue and net income growth can't move the needle. On the Q1 earnings conference call, Mayer issued what we consider to be a statement of defeat:
We've moved our core business from being in decline to a point of stable to modest growth but... we believe that the hyper growth we'd like to see will take multiple years.
In all reality, Yahoo may never realize hyper-growth. Without innovative new product categories, it's difficult to take share from Google. Mayer is trying to convince Apple (NASDAQ:AAPL) to make Yahoo its default search engine. She's trying to integrate Yelp (NYSE:YELP), she's trying to build up the video catalogue with original content, she's trying to monetize Tumblr, she's trying, trying, trying... but even she admits that hyper-growth in earnings will take multiple years. This realization should be enough to shift her focus towards the real opportunity at Yahoo, which is the unlocking of shareholder value.
2- Marissa Mayer is positioning Yahoo to be acquired or split up. Six months ago, it was still important to grow Yahoo's core business, because Alibaba was valued between $50 billion and $80 billion. Because of stellar 66% revenue growth and 110% profit growth, the Alibaba valuation is now approaching $200 billion to $250 billion, which completely changes Yahoo's game plan. Six months ago, Alibaba was viewed as a bridge to provide cash for Yahoo's next venture. Not anymore. At $200 billion, Yahoo's 24% stake is worth $48 billion. Since taking over as CEO, Mayer has quietly reduced the board down to only four independent directors. Kara Swisher recently wrote a piece in which she tried to figure out what's going on: And Then There Were Four-The Outlook for Yahoo's Ever-Shrinking Board Remains a Mystery.
Why might Mayer want to shrink the board prior to Alibaba's IPO? If the five members of the board, including Mayer, are on the same page, it makes for a swift approval process. If you were Marissa Mayer, would you rather spend 10 years battling Wall Street to get Yahoo a $60 share price or would you take an immediate buyout at $50? Her compensation package will end up giving her something north of 5 million shares in the company. Spending three years at Yahoo and earning $250 million would be a showcase of brilliant management. I don't think Mayer wants to spend the next 10 years begging for monetization growth when she could get a quick payday. Would you?
3- The wizard behind the curtain is... Jack Ma. As the founder of Alibaba, Jack Ma wants to maximize his investment. With Yahoo trading at a current market cap of $37 billion, he can acquire Yahoo's 24% stake in his company for $0.50 on the dollar if he strikes a deal prior to the IPO. For unknown reasons, Alibaba's F-1 filing has been delayed. Perhaps negotiations are taking place. The market cap disconnect in Yahoo is too compelling to ignore. Not only would Jack Ma get Yahoo's 24% stake in Alibaba, but he would also get the 35% stake in Yahoo Japan (OTCPK:YAHOF), the $4 billion in cash on Yahoo's balance sheet, and of course, Yahoo's core business. The sum of Yahoo's parts could be worth upwards of $70 billion. Shares in Yahoo were upgraded by UBS, and UBS told clients that the stock is "materially undervalued." Nobody has more to gain from a Yahoo acquisition or a Yahoo break-up than Jack Ma and Marissa Mayer. I'd love to be a fly on the wall listening to their discussions.
Back in 2011, Ma spoke at Stanford University, and was directly asked if his company was going to buy Yahoo. He responded:
We are very interested. Our Alibaba group is important to Yahoo, and Yahoo is important to us.
He later added that he wanted the "whole" company.
Nobody knows the exact details of how this Yahoo-Alibaba relationship will unfold, but we do know a material disconnect exists in the valuation of Yahoo's assets. It would make sense that Marissa Mayer and Jack Ma are in regular communication regarding a remedy. Perhaps Mr. Ma plans to launch his Alibaba service in the United States under the Yahoo brand. As a speculator in YHOO shares, this current scenario represents an ideal opportunity; even if nothing happens on the acquisition front, we still get the Alibaba IPO. With no signs of a downside trend in Yahoo's technical action, the risk/reward is extremely favorable. If a break-up or acquisition of the company occurs, the stock price will jump immediately on the news. During this pre-IPO period, we expect something will happen, simply because Yahoo's market cap isn't adding up. The players involved are too smart to let this disconnect pass them by.
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.