This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Alibaba IPO Could Hit Yahoo! Revenue Growth

NEW YORK (TheStreet) - Alibaba's prospective initial public offering could be a bonanza for Yahoo! (YHOO), an over 22% investor in the Chinese e-commerce giant. However, the offering could also hit Yahoo!'s top-line revenue, which fell 1% in 2013 when excluding traffic acquisition costs.

The revenue hit, something that hasn't been discussed much as Yahoo! investors handicap the company's ultimate Alibaba payout, will become evident after the IPO is complete.

>> Read More: Alibaba Underwriters Go From Alpha to Beta in IPO

>> Read More: Alibaba Files IPO with $1B Placeholder, Discloses Partnership

When Yahoo first invested in Alibaba in 2005, both companies entered a technology and intellectual property license agreement, known as TIPLA, which stipulated Alibaba would pay Yahoo a percentage of its total revenue.

Between 2006 and 2012, Yahoo received a 2% royalty equivalent to 2% of Alibaba's consolidated revenues less some costs. The TIPLA was amended at the end of 2012 so that Alibaba paid Yahoo! a $550 million lump sum and reduced its annual royalty to just 1.5% of consolidated revenue.

Under the TILPA, Yahoo received $95 million and $93 million in royalty fees from Alibaba in 2012 and 2013, or about 4% of the company's overall revenue for those years. Yahoo!'s annual 10-k filing with the Securities and Exchange Commission indicates the company booked in excess of $100 million in TILPA-related fees last year.

Those fees, however, will vanish from Yahoo! earnings just as the company receives a payout for any Alibaba shares the company sells in the IPO. Upon completion of Alibaba's IPO, the company will no longer be required to pay Yahoo! TILPA-related fees. "No royalties will be payable thereafter," Alibaba states in its IPO prospectus.

Alibaba-related fees are disclosed as 'other revenue' in Yahoo!'s results. While the end of those fees are a minor problem for Yahoo! given far larger gains the company is likely to record on its share sale, it could prove a meaningful number for investors.

Yahoo! has struggled to increase revenue in recent years amid challenges to the online display ad market and a general shift away from web portals towards mobile devices and social networks. In the first quarter of 2014, Yahoo was able to reverse its 2013 revenue declines, posting a 1% rise in revenue ex-TAC. Without Alibaba fees, it's unlikely Yahoo!'s revenue would have risen.

Bank of America Merrill Lynch analysts noted the cessation of Alibaba royalty fees in a May 7 client note assessing the impact of Alibaba's IPO filing on Yahoo!'s valuation. "Per the agreement (TIPLA) signed in Sept. 2012, upon the completion of the IPO, Alibaba will no longer pay royalty fees to Yahoo," Bank of America wrote.

Nevertheless, Bank of America analysts maintain a 'buy' rating for Yahoo! and value the company at $52 a share if Alibaba IPO's reaches a $210 billion valuation and $33 a share at a $130 billion valuation for its public offering.

Those analysts also noted that Yahoo! may have seen its stake diluted slightly in the first quarter. "Biggest negative of the filing may be that Yahoo's ownership appears to have been diluted a bit and now stands at about 22.6% (Alibaba value to Yahoo may need to be adjusted by -6%)," Bank of America wrote.

Alibaba said in its prospectus Yahoo! is still expected to sell 208 million shares of Alibaba in the company's offering. The deal likely will generate a significant tax bill for Yahoo!, analysts at Bank of America wrote.

Alibaba's F-1 pegged its fair value at $50 a share as of April 2014. Given the company's disclosure of 2.32 billion total outstanding shares, that fair value implies a valuation of about $120 billion.

Marissa Mayer's Alibaba Quiet Period

Yahoo! CEO Marissa Mayer declined to comment on Wednesday, citing a pre-IPO quiet period, when asked about Alibaba's IPO at a Techcrunch forum.

As TheStreet reported, Jacqueline D. Reses, a Chief Development Officer at Yahoo! and an Alibaba board director, will resign from the company's board of directors immediately upon the effectiveness of the its share offering.

Yahoo! shares fell over 6% to $34.25 in Wednesday trading. Shares in the company have fallen over 15% year-to-date.


WATCH: More market update videos on TheStreet TV ' More videos from Ruben Ramirez

>> Read More: Alibaba Files IPO With $1B Placeholder

>> Read More: The Biggest Risks In Alibaba IPO

-- Written by Antoine Gara in New York

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,083.80 -2.83 -0.02%
S&P 500 1,987.98 +0.97 0.05%
NASDAQ 4,472.1080 -1.5890 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs