Yahoo Can't Seem to Part Ways with Alibaba

Yahoo Inc cannot seem to part ways with Alibaba and with Yahoo's business continuing to deteriorate, some Wall Street analysts say it is hard to blame the company.

Yahoo said on Tuesday that it would keep a bigger-than-expected chunk of its stake in Alibaba when the Chinese e-commerce company goes public later this year.

That could give Chief Executive Officer Marissa Mayer, who celebrated her two-year anniversary at Yahoo's helm this month, more time to achieve a turnaround that has proven elusive.

"It remains a very large fig leaf," Pivotal Research Group analyst Brian Wieser said of Yahoo's Alibaba stake, which he said "obscures" Yahoo's weak results. "A lot of investors will certainly view it very favorably that they're holding on to more" of Alibaba.

Yahoo missed Wall Street's targets on Tuesday after a 24 percent plunge in online display advertising rates during the second quarter. Executives blamed difficulties selling premium ads to marketers as well as delays in rolling out a new advertising system. It expects to fix the problems over the next one or two quarters, but overall revenue growth remains well below rivals such as Google Inc and Facebook Inc .

Yet the company's stock has more than doubled since Mayer took over in July 2012. Analysts credit the ever-increasing value of Alibaba, of which Yahoo owns roughly 24 percent.

Alibaba is expected to list its shares on the New York Stock Exchange this fall in what could be the largest U.S. technology IPO. Investors value the company, which handles more e-commerce than Amazon.com Inc and eBay Inc combined, at as much as $200 billion.

Now, instead of being required to sell 208 million Alibaba shares in the IPO under the terms of a deal with Alibaba, Yahoo must sell 140 million shares, the company said on Tuesday.

"Anytime you can keep more of an asset that's growing as fast as Alibaba is, that's a good thing," said JMP Securities analyst Ronald Josey.

Mayer has improved certain aspects of Yahoo, such as boosting its mobile users, said Josey. But as the Alibaba IPO approaches, investors will increasingly focus on its shaky fundamentals, he said.

Asked if Yahoo paid Alibaba to amend the share sale agreement, Yahoo Finance Chief Ken Goldman told analysts on a conference call that "there is nothing specific that we have done."

While retaining a larger slice of Alibaba might keep investors happy and take the heat off Yahoo's own business, the move is not without its risks, noted BGC analyst Colin Gillis.

If Alibaba's stock price does not fare well after its IPO, as occurred to Facebook in 2012, Yahoo may rue not selling early.

"They have a window to sell and they're choosing not to," Gillis said. "Now they're playing investor on us."