Yahoo may rethink $5B Alibaba payout

Aug 10, 2012, 12:14 AM EDT
SUNNYVALE, CA - JULY 17: The Yahoo logo is displayed in front of the Yahoo headqarters on July 17, 2012 in Sunnyvale, California. Yahoo will report Q2 earnings one day after former Google executive Marissa Mayer was named as the new CEO.
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(Adds analyst and investor comments, background)

By Alexei Oreskovic

SAN FRANCISCO, Aug 9 (Reuters) - Yahoo Inc startledinvestors by announcing that new Chief Executive Marissa Mayermay reconsider what it does with the cash it gets from amulti-billion dollar sale of half of its 40 percent stake inChinese Internet company Alibaba Group.

Shares of Yahoo, which had previously promised to returnmost of the cash to shareholders, slid 3.5 percent to $15.45 inafter hours trade.

Yahoo said in a filing with the U.S. Securities and ExchangeCommission on Thursday that Mayer, who was hired as CEO lastmonth, has started a review of the company's strategy.

The filing said the review "may lead to a re-evaluation" ofYahoo's previously announced plans to return to shareholderssubstantially all of the after-tax cash proceeds under theinitial share repurchase from the May 2012 deal with Alibaba.

Under the agreement, Yahoo was to sell one-half of its stakein Alibaba for at least $6.3 billion in cash and up to $800million in new Alibaba preferred stock.

"There was an expectation of getting that cash back, so Ithink there will definitely be some disappointment," said RBCCapital Markets analyst Andre Sequin.

But he said that shareholders also expect Mayer, a formerGoogle Inc executive, to re-invest in the company'sdomestic business to rejuvenate the struggling Web company.

As part of Mayer's review, Yahoo said, she would look at thecompany's growth and acquisition strategy, the restructuringplan launched by her predecessor, and Yahoo's cash and capitalallocation strategy.

Mayer is the latest in a string of executives to try reviveYahoo, a one-time Web pioneer which has seen its revenue fallamid competition from Google and Facebook Inc, a ndchanges in the online advertising market.

Analysts expect the 37-year-old Mayer, whose background isin computer science, to focus on bolstering Yahoo's technologyand online products rather than working on media and contentpartnerships as the company seemed to be doing before herarrival.

The cash Yahoo gets from Alibaba could be used to finance ashopping spree of new acquisitions, said Susquehanna FinancialGroup analyst Herman Leung.

"I think there's a little bit of concern about that," Leungsaid, noting that Yahoo's track record for acquisitions has notbeen great.

"Historically , a lot of the acquisitions have driven morecomplexity than anything else," said Leung.

But Mayer's background at Google, which has made relativelyfew large acquisitions in its 14-year history, could suggestless of an appetite for big deals, noted Adam Seessel, directorof research at Martin Capital, which own Yahoo shares.

"She was born and raised inside Google," and is probably"not the kind of person prone to run out and spend billions onacquisitions," said Seessel.

He also noted that Mayer appeared to have the backing ofactivist hedge fund manager Dan Loeb, who now sits on Yahoo'sboard and has been a strong advocate for shareholders'interests.

Yahoo has experienced a tumultuous year that included thefiring of CEO Carol Bartz in September and the resignation ofCEO Scott Thompson in May as a controversy over his academiccredentials flared up.

The status of Yahoo's Asian assets have been similarlyconvoluted. Efforts to craft a complex $17 billion asset swapwith Asian partners Alibaba and Softbank fell apart in February, and a separate effort to monetize its 35 percent holding ofYahoo Japan stalled earlier this year.

Yahoo's Asian assets currently account for nearly all ofYahoo's $19.6 billion market valuation, according to analysts.

"Clearly that's one of the big strategic items confrontingYahoo, is this big cash hoard they're going to get," said MartinCapital's Seessel. "In that sense she's right to take a look atit," he said of Mayer. (Reporting By Alexei Oreskovic; Editing by Richard Chang, SteveOrlofsky and Bernard Orr)