What Will Yahoo!'s Mayer Do With All That Cash? (Update 1)

Updated from 10:17 a.m. EST to provide more detail on Third Point in the fifth paragraph.

NEW YORK ( TheStreet) -- Yahoo! ( YHOO) CEO Marissa Mayer has not been on the job a month, but she's already making some bold steps to try to change the company's fortune. Now it looks like she's changing the fortunes of shareholders as well.

Yahoo! filed an 8-K discussing the use of the cash the company is expected to receive from its deal with Alibaba, of which it owns a significant portion. Yahoo! is set to receive $7.1 billion from Alibaba as the Chinese e-commerce company buys back half of the stake Yahoo! owns.

The original plan was to return this cash to shareholders in the form of a buyback. Mayer appears to be putting her foot down and changing that plan. Here's the requisite part that signaled a change in thinking.

As reported in our Form 10-Q for the quarter ended June 30, 2012 filed today with the Securities and Exchange Commission, Ms. Mayer is engaging in a review of the Company's business strategy to enhance long term shareholder value. As part of that review, Ms. Mayer intends to review with the Board of Directors, among other things, the Company's growth and acquisition strategy, the restructuring plan we began implementing in the second quarter of 2012, and the Company's cash position and planned capital allocation strategy. This review process may lead to a reevaluation of, or changes to, our current plans, including our restructuring plan, our share repurchase program, and our previously announced plans for returning to shareholders substantially all of the after tax cash proceeds of the initial share repurchase under the Share Repurchase and Preference Share Sale Agreement we entered into on May 20, 2012 with Alibaba Group Holding Limited.

Yahoo!'s largest shareholder may be on aboard. Third Point, run by hedge fund honcho Daniel Loeb, is Yahoo!'s largest institutional shareholder, with 5.77% of the stock, according to Thomson Reuters. Reuters reported that sources familiar with the Yahoo! board's thinking -- where Loeb is a director -- back Mayer's decision to reevaluate the cash position.

Yahoo! has had a number of CEOs over the past 12 months (Carol Bartz, Tim Morse, Scott Thompson, Ross Levinsohn and now Mayer), as well as a number of strategies. That's confused investors, and this change of plan may confuse investors even more. Barclays Capital analyst Anthony DiClemente said the development is "somewhat concerning." He noted a change in sentiment around Yahoo! recently, largely due to the positive buzz surrounding Mayer's hire and the buyback.

"However, given tonight's filing, we believe that concerns around a smaller-than-expected buyback could remain a headwind until investors get more clarity," DiClemente wrote in a research report. He rates Yahoo! equal-weight with an $18 price target.

Pivotal Research Group analyst Brian Wieser echoed those sentiments, suggesting investors take "a 'wait and see' approach." Wieser rated shares buy with a $19 price target.

Mayer's strategy, although not laid out in full, is reportedly to "leverage the company's strong franchises," and improve its focus on search. Wieser noted the change in strategies from Levinsohn to Mayer, as Mayer focuses more on growth initiatives, and "improve its core product offerings rather than to generate cash or profits as a first priority."

If the cash is not returned to shareholders and acquisitions are indeed a part of the plan, there are several names which have been mentioned before as potential takeover targets.

Hulu, The Weather Channel, and TripAdvisor ( TRIP) were names that were floated as part of the cash-rich split deal between Alibaba and Yahoo! that ultimately went nowhere. Ironfire Capital founder and president Eric Jackson suggested others as well.

"Lots of good ones out there," Jackson said in an email. He mentioned Yelp ( YELP), Open Table ( OPEN) and Zillow ( Z), in addition to Trip Advisor.

Zillow already has a relationship with Yahoo!, as the company runs Yahoo! Real Estate, one of the largest real estate portals on the Internet. Zillow could not be reached for comment on this story.

Investors have initially reacted to this news negatively, sending shares lower in Friday trading. Should Mayer successfully integrate one (or more) of the aforementioned names, investors might want to think otherwise.

Interested in more on Yahoo!? See TheStreet Ratings' report card for this stock.

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-- Written by Chris Ciaccia in New York

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