Alibaba's IPO Could Bring Yahoo Lots Of Cash And Then What?

May. 9.14 | About: Yahoo! Inc. (YHOO)

Summary

Yahoo has certain structural problems.

Yahoo may receive a windfall from Alibaba's IPO.

The money might not really matter.

I have been amused by the excitement on the web recently about Alibaba (ABABA) and the amount of cash it could bring Yahoo (YHOO) if it successfully files its IPO.

To recap, Alibaba filed F-1 papers for initial public offering of its stock. While the company has not specified either the number of shares to be sold in the IPO or the price range, it is estimated that it plans to raise at least $1 billion through this sale.

Many analysts expect the company to raise over $18 billion at a valuation of close to $200 billion.

Alibaba Group Holding Ltd is the biggest online retail company in the world. In their filing with the SEC, they proclaim themselves to be "The largest online and mobile commerce company in the world."

The company generated nearly $6.5 billion in revenues and $2.9 billion in net income during the first nine months of fiscal 2014 (ends in March).

Since Yahoo has a 24% stake in the company, it could be in for a big payday after a successful IPO.

So what? Let's go a little deeper

So let's assume Yahoo has this enormous pile of cash from this new windfall. What next? Well, the conventional wisdom is that the money will be spent on new products and R&D.

While money is always helpful, it's probably instructive to see what Yahoo actually needs today.

I would say that Yahoo is in need of three core changes in its business.

Better Search

Google (GOOG, GOOGL) has a better search engine and Yahoo needs to fight asymmetrically.

Rather than try and compete head on against Google, Yahoo needs to find a way to change the conversation. To that end, they might want to acquire a company like VURB.

VURB is the company that just won the tech competition TechCrunch Disrupt 2014 and have a very innovative way of looking at search.

You can see their pitch video here.

Yahoo needs to do a better job with advertisers and publishers.

I have been a Google Adsense Publisher for about 11 years.

Adsense allows website owners like myself to monetize their traffic while Google acts like a middleman between the website owner and advertisers.

Google has the most effective advertising service on the web. It's easy to implement, easy to track and pays like clockwork.

Yahoo on the other hand has stumbled in this regard for years. Despite years of attempting to compete with Google in this arena, they simply have not been able to compete for the hearts and minds of advertisers or website owners.

They seem to be trying again but this has been their Achilles' heel for years.

Finally Yahoo has tons of traffic but has not been able to exploit it effectively. With approximately 700 million desktop users and 430 million mobile users, the company needs to do a much better job of monetizing its users.

Here are my suggestions:

Change the definition of search

Yahoo needs to think asymmetrically about Search and redefine the way we search and get our useful information.

VURB had a really good idea and Yahoo needs to double down on new search paradigms and go BIG.

Change the conversation from Google's definition of search.

Steal publishers and (by default) advertisers from Google

Simply put, Yahoo needs to be willing to lose money short term by stealing publishers and advertisers from Google.

An easy way to do it is to guarantee publishers will not lose income for the first calendar year.

Don't take my word for it, I'll show you years of data. You only have to look at the Adsense forums on Webmaster world to see that a lot of publishers feel that Google isn't the best deal but have nowhere else to go.

Yahoo would be wise to start there.

Establish social anchors on the web

Google has +1 Widgets, Facebook (NASDAQ:FB) has Likes and Yahoo has … nothing. These anchors not only drive conversations to the home pages of their respective companies but they also establish those companies as leading social companies.

Today, Yahoo is not part of that conversation.

For Investors

Investors should look carefully at Yahoo's developments and acquisitions if they get this Alibaba windfall.

It has also been pointed out that a lot of investors used Yahoo as a vehicle to buy Alibaba shares by virtual proxy. Once Alibaba is public, they won't need Yahoo stock anymore.

Having said all that, Yahoo does have tremendous potential but the company needs to spend its money more strategically.

Ultimately it's not the amount of money it gets that matters, it's how the company spends it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. I am the CEO of Learn About The Web Inc. (www.learnabouttheweb.com). Learn About The Web™ is an online business education platform dedicated to providing universities with the tools required to credibly teach online business. I teach and discuss online business companies (including Yahoo) frequently.