Must-know: Will Alibaba help Yahoo?

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Alibaba agrees to reduce the number of shares that Yahoo needs to sell at the IPO

In the previous part of the series, we discussed Yahoo’s (YHOO) disappointing 2Q14 earnings and how it continues to lag behind Google (GOOGL) and Facebook (FB) in the digital advertising market. However, this negative news was offset by positive news that Yahoo will get to keep more of Alibaba’s shares when it goes public in the U.S. Yahoo currently holds a 23% stake in Alibaba. Alibaba agreed that Yahoo will need to sell only 140 million shares of Alibaba at the initial public offering (or IPO)—down from the earlier decided 208 million shares. This will be equivalent to unloading only 27% of Yahoo’s stake in Alibaba—down from earlier decided 40% of its stake.

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This is good news for investors because Yahoo will get to keep Alibaba’s shares longer because it’s expected that Alibaba’s valuation will increase with time as the company grows bigger. It will also be a good news for exchange-traded funds (or ETFs) such as the DJ Internet Index Fund (FDN) and the NASDAQ Internet Portfolio (PNQI), which have high exposure to Yahoo.

Yahoo Cash Balance

How Yahoo could make use of cash proceeds from the IPO

Before the IPO, Alibaba values itself at $130 billion. Even if we consider that Alibaba’s valuation doesn’t appreciate after the IPO, Yahoo will still get an additional cash amount of ~$8 billion from the sale of the proceeds. After-taxes the amount would be $5–$6 billion. As the previous chart shows, Yahoo’s current cash balance is ~$4.3 billion, which will more than double after Yahoo sells the required number of Alibaba’s shares at the IPO. Yahoo plans to return at least half of the after-tax proceeds from the IPO to shareholders. This is why it’s a good news for investors.

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