An Alibaba IPO means lots of cash for Yahoo to spend on more acquisitions

The Chinese Alibaba Group filed for what could be a record-breaking tech initial public offering Tuesday. And, thanks to a 2005 investment in the company, Yahoo is in line to get a major cash infusion from the IPO.

That money could help Yahoo fund its ongoing acquisition spree even as its core business continues to be tested. Yahoo invested $1 billion in Alibaba back in 2005, buying 40 percent of the company. Although it sold some of that stock back in 2012, the  U.S. tech giant maintains a 22.6 percent stake in the Chinese company. But, according to an agreement detailed in Alibaba's filing, Yahoo must sell roughly 40 percent of its share as part of the IPO. It's unclear just how much money that will mean, but there's no doubt it's going to be a substantial windfall.

Matthew Turlip, an analyst at financial analysis firm PrivCo, estimates the value of Alibaba at $195 billion, which would make Yahoo's stake in the firm worth about $44 billion.

"To put that in perspective, that's larger than Yahoo's current market cap," which is about $33 billion, says Turlip. "So, Yahoo's 23 percent ownership is worth more than the total value of Yahoo's stock in the market right now." Based on Alibaba's more modest  $120 billion self valuation in its IPO filing, Yahoo's ownership stake is worth about $26 billion.

During chief executive Marissa Mayer's tenure, Yahoo's stock prices have shot up, but some observers believe that growth was driven by Alibaba. In fact, based on analyst valuations of how much Alibaba and Yahoo's stake in Yahoo! Japan are worth, some industry watchers have even speculated that Yahoo's core business may be essentially worthless.

That could be a big problem because Yahoo's smaller stake in Alibaba after the IPO would mean that Yahoo's core business will have to stand on its own. Of course, Yahoo has been making a lot of investments recently, including hiring former New York Times tech guru David Pogue to head a digital magazine on tech and bringing on Katie Couric as its "global anchor." Yahoo has also made some substantial headway in attracting traffic.

But from a technical perspective, many still consider Yahoo the scrappy underdog. A decade of losing ground to Google and Facebook has made it hard to for Yahoo to compete for top engineering talent. And a series of embarrassing security and stability incidents over the past year haven't eased that recruitment problem.

Yahoo has responded by launching an acquisition spree -- both for actual products and for the people who come with them. The company has made 22 acquisitions in 2013 alone -- more than Google or Facebook, according to PrivCo. And between when Mayer took over in July of 2012 and February, the company has made 37 acquisitions according to CB Insights, including the $1.1 billion purchase of blogging platform Tumblr and also many small acquisitions that brought mobile development talent onboard.

In an earnings call in January, Mayer responded to a question about her strategy by outlining three types of acquisitions Yahoo was pursuing: "smaller, talent acquisitions" aimed largely at bringing people into the existing company; small, strategic acquisitions where features and products were integrated into the existing core business; and "fundamental building blocks" like Tumblr.

Interestingly, Turlip notes there's some parallel between Yahoo's acquisition behavior and that of Alibaba, with PrivCo attributing $25 billion of its $195 valuation of the company to equity from recent acquisitions and mergers.

"They've been on an acquisition and investment spree themselves," Turlip says of Alibaba, which has been shoring up perceived weaknesses in media production and physical retail space through investments in China Vision Media and InTime Retail Group.

It has invested in U.S.-based tech companies, as well, such as side-sharing app Lyft and the video calling service TangoMe. "We expect with the IPO, they will even further their acquisition spree and investments in American tech companies," Turlip says.

Correction: An earlier version of this article erroneously said that Yahoo invested $1 million in Alibaba in 2005 -- that investment was actually $1 billion. We regret the error. 

Andrea Peterson covers technology policy for The Washington Post, with an emphasis on cybersecurity, consumer privacy, transparency, surveillance and open government.
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