Alibaba Group Holding Ltd’s upcoming public offering will give Yahoo Inc billions of dollars for a potential shopping spree that investors hope will jumpstart its comeback.
But with numerous holes to fill and soaring tech company valuations, Yahoo will have to make tough choices with any acquisitions.
Yahoo is expected to sell about $9.5 billion in stock of the Chinese e-commerce company. After giving at least half back to investors and paying taxes, Yahoo's cash stockpile, currently $4.2 billion, may swell by $3.1 billion. That is not a lot in Silicon Valley these days.
“They are not in a position to make huge acquisitions,” said Jean Yu, assistant portfolio manager of the $2.8 billion ClearBridge Value Trust fund, which owns Yahoo shares. Yu expects the new proceeds to be used for deals around several hundred million dollars each.
Yahoo’s revenue growth has stalled in recent years as its once-hot Web portal and email service have lagged rivals. Key areas in need of repair include Yahoo's mobile offerings and an advertising system that doesn't deliver the precise targeting available from rivals like Google Inc and Facebook Inc, investors say.
Yahoo is not one of the first three or four places that consumers go to on their mobile phone, said Bill Tai, partner emeritus at venture capital firm CRV.
“All the momentum right now is shifting rapidly to mobile," said Tai.
Chief Executive Marissa Mayer has more than doubled monthly mobile users to 450 million since taking the helm two years ago. She revamped the line-up of mobile apps by making small acquisitions that brought in teams of mobile engineers.
That may be the path forward, too, since many of the best-known mobile properties are out of Yahoo's financial reach. Messaging service Snapchat, for instance, was recently valued at close to $10 billion, according to the Wall Street Journal.
Online review site Yelp Inc is a long-rumored Yahoo acquisition target that could help Yahoo expand into new "transactional" businesses, such as restaurant food deliveries from which Yahoo would receive fees. But with a $5.5 billion market cap, Yelp would represent a huge acquisition for Yahoo that might not go over well with investors.
Yahoo was not immediately available for comment.
Some argue that Yahoo could get more bang for its buck by focusing its acquisitions on advertising technology, a sector where prices are not as rich.
Publicly-listed ad tech companies such as The Rubicon Project Inc, YuMe Inc and Tubemogul Inc all have market values of roughly $400 million or less, while the privately-owned AppNexus was valued at $1.2 billion in its most recent funding round.
Advertising also could deliver an immediate jolt of revenue, said Pivotal Research Group's Brian Wieser. "The good news about ad tech is there are a lot of real businesses."