The Cursed Diamond Yahoo! Owns

Marissa Mayer
CEO of Yahoo! Inc.

Yahoo! is a titan from the beginning of time. With billions of users from multiple services and products, it has over 400 million users on its social product alone. In total, Yahoo! has harnessed billions of users from all of its services and products.

With about four billion dollars in revenue a year, a billion of that from mobile, Yahoo! is a powerful company. Beside all that, the internet company that survived the dot-com bubble is also the third largest search engine.

The company is performing nicely, although not as intended, but indeed it's still a success in progress. Yahoo! also has a longstanding investments that are performing well. When Marissa Mayer held the CEO title, the company's core business thrives.

From all that, there could be nothing wrong with Yahoo!. That is before Alibaba steps in.

The total value of all outstanding shares of the publicly-traded company is worth around $44 billion. That valuation includes the 15.4 percent ownership of the Chinese e-commerce giant Alibaba, worth about $38 billion.

A Diamond In The Vault, Waiting To be Split And Polished

By owning a segment of Alibaba's pie, Marissa Mayer is certain that Yahoo!'s value increases whenever Alibaba's share price increases. Yahoo! needs to do nothing, and that is actually an advantage for the internet giant Yahoo!.

While Alibaba boosted Yahoo!'s stock in the short term, Mayer is trying to set the stage for a comeback in the long term. "As I've said before, companies with the best talent win, and it's clear we're now back in the game," said Mayer.

But on the other hand, the partial ownership of Alibaba by Yahoo! can give a problem when the value of the company has nothing to do with the things the company actually does.

The problem comes from investors. They aren't buying what Yahoo! has, but making sideways investment in other entities that Yahoo! owns.

With Yahoo! aiming to create a spin-off company just to hold Alibaba's share, it's keeping investors out of its back, just as easy as keeping their interest away from Yahoo!.

This is like inviting someone for dinner, and the guests aren't happy with the meals you're serving. They're more interested on the diamond you own behind the vault.

Yahoo! is doing well, but it's the way it pronounce itself to the world is what made it worth less that it actually does.

The Yahoo! Revolution

Before being popular and successful, Yahoo! started as an idea from its founders. When Yahoo! started to grow, Jerry Yang, one of Yahoo!'s co-founder, made a partnership with Yahoo! Japan with Japanese businessman Masayoshi Son. The partnership has proved to be very successful.

Almost a decade later, Yahoo! wanted to do the same thing in China. But it failed.

"China turned out to be a very different place," said Yang. "We were not doing well, struggled with acquisitions there. We were looking to parlay an operational role, where we rely on a partner, invest and be along for their ride."

At that time, Yahoo!'s CEO was Terry Semel, and his COO was Dan Rosensweig. The two suggested Yang to pick a partner in order to make a strong stand in China. One company was beating Yahoo! fairly in the country, and that company was Alibaba, led by Jack Ma and his CFO Joe Tsai.

"It was fairly obvious to choose," continued Yang. The deal was made on the Pebble Beach golf course in 2005, with Yahoo investing $1 billion for 40 percent of Alibaba. "We were in the right place in the right time," he said. "It was probably good that we had been failing in China."

In the next close future, Yahoo!'s stock and revenue fell, but at the same time, Alibaba grew even bigger. Yahoo!'s stake increased dramatically, but its role is somehow reversed. Alibaba took its role as the new rising star, and it was unhappy that a declining company owned such a huge share of its value. The role reversed as Yahoo! became more dependent on its Alibaba's stock, rather than Alibaba depending on Yahoo!.

In 2008, Microsoft made a bid for Yahoo!. The software maker proposed $44.6 billion in cash-and-stock to acquire Yahoo!. Yang declined, largely because he knew how big and valuable Alibaba's stock can be. "I am happy that the company had an asset, a buffer to allow its reinvention," Yang explained.

With Yahoo! depending more on its Alibaba's value, the ownership of the share is becoming a blessing in disguise. Because Yahoo! held such a valuable, but undervalued asset kept within its vault, investors are jumping in, sensing it to be a bargain.

Different Yahoo!'s investors have different ideas. Some senses that Yahoo should give the money back to shareholders, thinking that someday Alibaba would eventually buy Yahoo!.

When Alibaba went public, Yahoo! was bound to sell more than 261 million shares of Alibaba while keeping half of its remaining stake. "Being forced to sell half our stake at the IPO was an unmitigated financial disaster," said Jackie Reses, Yahoo!'s Chief Development Officer who worked at Mayer's side.

What Yahoo! did was saving billions of U.S. dollars. Mayer returned half of the after-tax money to shareholders in the form of a share buyback. The other half went to Yahoo!’s cash reserves.

After selling its shares, Yahoo! was left with about $40 billion worth of Alibaba in its valuation. This massive number is tempting, and it still attract many active investors. Some felt that instead of using its money to restore Yahoo! back, and make it once again an internet icon, investors pitched an idea to Yahoo! that it would be more reasonable for it to merge with AOL. Yahoo! was also said to not do any acquisitions.

Other investors attacked Mayer by sending letters and essays, one after another. They urge Yahoo! to unleash Alibaba's massive potential, releasing all of its stake so shareholders could get their hands on it.

Mayer responded differently from one investors to another. She didn't want to make shareholders to debate in her meetings. But she's willing to separate Alibaba from Yahoo!'s acquisition.

It was in January 2015 that Mayer announced what she hopes will be the resolution to Yahoo!'s struggle.

High Hopes, High Benefits

Yahoo!'s idea to please all parties was to separate all of its remaining Alibaba shares from Yahoo!, and put it in a new company that does nothing but hold those shares. This spin-off company, SpinCo as Yahoo! calls it, will give one share to each current shareholders.

Marissa Mayer has been facing pressure from investors to liquidate the company's Asian assets, which in theory, are worth as much as Yahoo! itself, and return the proceeds to shareholders.

What Yahoo! did was making the investors who don’t care about Yahoo! but care about Alibaba, to simply buy shares in SpinCo. Yahoo!'s core business will have its own valuation, reflecting what the company actually does, and how much it's worth.

Mayer was pleased with the situation. "As a company we want to stand on our own two feet and be recognized for our accomplishments and also be held accountable for our shortcomings," she said. "That's just something that as a healthy, thriving company we should be able to do and we should welcome."

On Alibaba's side, the news is not so much of a debate. As the company sees it, 15 percent stake owned by a single Yahoo!, or owned by many different companies, will make no difference. However, Alibaba did praise Mayer and Reses.

SpinCo can be better for Alibaba because Alibaba can buy back it's own share, and that would make it more liquid. And the deal could also make Alibaba able to buy back the stock (from SpinCo) without buying Yahoo!'s stock.

SpinCo is a great idea that benefits everyone. But to some extent, still gives Yahoo! some downsides. By divesting the shares, Yahoo! can make easy money instantly by selling the shares, but the more it sells, the more it have less in reserve to fund further acquisitions, or even operating expenses.

By putting Alibaba's shares away from Yahoo!, Mayer should be able to get those investors out of her back, but at the same time, she can no longer hide behind Alibaba's stake, which has been one of the key driver of its stock price. Yahoo!'s holdings in the Chinese company have provided Mayer with a grace period to revive the company since she took leadership.

But that didn't make Yahoo! fall. The company is still sitting on a huge reserve it can manage. "We still have significant cash resources on our balance sheet," Reses explained. "That's what our job is - we have to build a successful company and provide returns to all our stakeholders.”

Another downside for Yahoo! is that, with less "diamonds" it has in its vault, the company becomes more prone to takeovers. Alibaba's share that Yahoo! held for too long has somehow cursed Yahoo! in an inevitable condition, one way or another no matter which decision it's making.

"That's not something that I spend my time thinking about," answered Mayer concerning the issue. "I spend my time thinking about how can we build the best possible products and services for our users. And the right outcome will come from that."

"We really needed to build ourselves a future," she said.

Eric Jackson, the investor who originally discovered Alibaba stored as a diamond in Yahoo!'s vault, supported Mayer for a while, but now he's critical of her decisions. However, he still thinks that Yahoo! is a capable and powerful company, even without Alibaba. In fact, he hopes that Mayer will make some of the moves he prefers - such as cutting cost expenses by laying off employees and revive Yahoo! in other ways.

"I hope Marissa figures it out - she has a chance to be a real hero," Jackson said. "I hope she does the right thing".

What Mayer wants is making Yahoo! stands on its own feet again, by relentlessly concentrating on the big job of "returning an iconic company to greatness," a phrase she often used.