After Huge Alibaba Payday, a Test for Yahoo Executives

SAN FRANCISCO - For Yahoo, the initial public offering of stock in the Alibaba Group will unlock the door to a giant trove of cash. Depending on the price of the deal, Yahoo most likely will receive $10 billion to $15 billion for the 9 percent stake in the Chinese e-commerce company that it is selling in the offering.

The I.P.O. will also bring an end to the long honeymoon of Yahoo's chief executive, Marissa Mayer. Since she was hired in the summer of 2012, investors have paid little attention to her efforts to revive the fading Internet company and instead focused on what would happen with Yahoo's longstanding investments in Alibaba and Yahoo Japan. At Yahoo's current stock price of $36.49, some analysts say investors are basically buying those foreign investments and getting Yahoo's core operations free.

When Alibaba begins trading as a public company, however, that crutch will disappear. Ms. Mayer will then have to prove to Wall Street that she has a viable plan to save Yahoo and will use the Alibaba windfall wisely.

'What do you do with that money?' asked Robert S. Peck, an analyst with SunTrust Robinson Humphrey, who estimates that Yahoo will end up with about $8 billion after taxes.

Yahoo executives aren't saying much, citing a regulatory quiet period surrounding the I.P.O. But they dropped a few hints during an April conference call to discuss the company's first-quarter financial results.

'We intend to be good stewards of our capital and we have been to date,' Ms. Mayer said in the call, in response to a question about what she might do with a sudden influx of cash. 'When we look at the investments we need to make in the business, you'll see the same type of mix we've been making to date. Some strategic acquisitions, some tuck-in acquisitions, and we really need to see what opportunities arise in terms of the ways we could deploy the cash at that time.'

Analysts predict that Yahoo will spend a large portion of the proceeds from the Alibaba stock sale to buy back shares of Yahoo. A buyback would in theory make the company's shares more valuable because each remaining share would have a slightly bigger claim on Yahoo's business.

Ms. Mayer could also throw a few coins directly to shareholders in the form of a dividend, which would be taxable to the recipients but give them a very tangible piece of the cash hoard. Yahoo pays no dividend now.

Yahoo is likely to keep the rest of the money for acquisitions, adding to the $2.9 billion in cash and liquid investments it already has.

Under Ms. Mayer, Yahoo has made dozens of tiny acquisitions, and one large one - the $1.1 billion purchase of Tumblr, a blogging platform, last May. In recent months, rumors have swirled that Yahoo was sniffing at larger prey, like the instant-messaging service Snapchat or an online video service that would help it compete with Google's YouTube.

Yahoo Japan, a joint venture between Yahoo and SoftBank, a Japanese technology company, holds riches, too. It operates independently from Yahoo, which owns about 35 percent of the company and records a proportional share of its revenue and profits. Yahoo Japan's stock is publicly traded in Tokyo; Yahoo's stake is currently worth about $9.2 billion.

During the April call, Yahoo's chief financial officer, Kenneth A. Goldman, suggested that the company would look more closely at international acquisitions as a way to bolster the company's foreign presence.

Whatever Yahoo does, shareholders want some assurance that it fits a broader strategy, Mr. Peck said. 'Don't waste our money,' he put it. 'Don't pay $17 billion for something with no revenue, like WhatsApp,' the instant-messaging service bought by Facebook for roughly that sum early this year.

When Alibaba begins trading as an independent stock, many investors who bought Yahoo as a proxy for the fast-growing Chinese company will simply buy Alibaba directly.

Those who continue to buy Yahoo, analysts say, will expect Ms. Mayer and her top executives to show better results from its business of delivering Internet services and advertising to 800 million users a month.

Mark Mahaney, an analyst at RBC Capital Markets, said he could not discuss Alibaba because his firm hoped to play a role in the I.P.O.

But he pointed out that Yahoo's advertising business lags competitors like Google, Facebook and Twitter, and is especially weak in the fastest-growing areas of digital advertising. 'The fact that mobile, social and video are still immaterial to Yahoo's revenue paints a very sharp picture of how much catch-up work Yahoo still has to do,' he said.

Even after the I.P.O., Alibaba will retain some ties to Yahoo.

Yahoo will continue to own about 13.6 percent of Alibaba, giving it a share in future profits of the company. Although the two companies have no joint business ventures, Jacqueline D. Reses, Yahoo's chief development officer, sits on Alibaba's board, giving her a prime view into the Chinese Internet market.

A successful I.P.O. will be vindication for Jerry Yang, Yahoo's co-founder and former chief executive. Mr. Yang struck up a friendship long ago with Alibaba's co-founder, Jack Ma, and had the foresight to buy about 40 percent of the nascent Chinese company in 2005.

Investors later savaged Mr. Yang for rejecting Microsoft's 2008 offer to buy Yahoo for $47.5 billion. But Yahoo ended up being worth more than that, mostly because of the Alibaba investment. Yahoo sold about half its original stake back to Alibaba in early 2012 for about $7.1 billion.

With Alibaba soon to play a much smaller role in Yahoo's finances, Ms. Mayer and other top executives will get an unvarnished look at how investors view their leadership.

'Right now, it's hard for them to tell what the market really thinks,' said Brian Wieser, an analyst with Pivotal Research Group. 'They can have a messy quarter, they can have a great quarter, it's unlikely to make any difference.'

Once Alibaba stock begins trading, Mr. Wieser predicted, 'the management team has a couple more quarters.'

But if they don't show substantial progress on a turnaround by then, investors could decide to put their money elsewhere.

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