Yahoo! Is Lucky to Still Have Its Alibaba Stake

NEW YORK (TheStreet) -- When Alibaba finally goes public later this year, Yahoo! (YHOO) will be lucky to still own 24% of the company. (Of course, it will get whittled down post-IPO to 12%.)

Back in 2005, Jerry Yang wisely invested $1 billion into the company for a 40% stake. Some have bemoaned the fact that Yahoo! still doesn't own 40% of the company today. If it did, and Alibaba was able to get a $200 billion valuation -- as some think they will -- that 40% stake would have been worth $80 billion (pre-tax, of course). Yahoo!'s entire market cap today is around $36 billion.

Instead, two years ago, Yahoo! decided to sell down its 40% stake to 24%. The problem for Yahoo! shareholders is that Yahoo! did so while valuing Alibaba at only $35 billion.

Did Yahoo!'s board make a big mistake by selling down its stake? To some extent, yes. Softbank owned 37.5% of Alibaba three years ago and never felt it was important to sell down its stake. It owns the same amount today and will reap the benefits upon the IPO.

However, Alibaba clearly wanted to buy back some of its stake two years ago. Had Yahoo! not sold, Alibaba could have continued to stonewall the idea of holding an IPO. The deal certainly seemed to grease the skids to get an IPO moving.

So, even though I -- as a Yahoo! shareholder -- wish it had been able to hold on to a big stake of Alibaba, if  I get upset I remind myself of an important fact: Given how bad Yahoo!'s board was a few years ago, it's a blessing Yahoo! kept a hold of this Alibaba stake at all.

Just think: A few years ago, Yahoo! had the worst corporate board in America. There was Roy Bostock as the Chairman and Patti Hart -- now CEO of International Game Technology (IGT) -- as his sidekick.

Roy Bostock was, of course, on the Yahoo! Compensation Committee that decided to pay Terry Semel over $600 million in total compensation over six years.

He then graduated to become chairman just in time for the Microsoft (MSFT) bid for the company in early 2008. Bostock spurned the Microsoft offer. He clashed with Carl Icahn and then offered Icahn a seat on the board next to him.

Bostock then appointed Carol Bartz as CEO. One of her first actions was to kill Yahoo!'s own search engine in favor of Microsoft's Bing. That deal has been an albatross around Yahoo!'s and CEO Marissa Mayer's necks. It's five years on and Yahoo! lost all its technical talent in search and any serious ability to ever play a key role in search.

A few years after lauding Bartz, Bostock turned around and summarily fired her, just days before Dan Loeb revealed that he owned a large stake in the company. The move was a ploy to try and take away a key plank in Loeb's expected bullet points for change he wanted.

Bostock felt he'd outmaneuver Loeb by hiring PayPal head Scott Thompson as CEO. Instead, he set himself for the embarrassing revelation that Thompson had never received a Computer Science degree that he claimed from Stonehill College.

All this while, Yahoo! saw its core business contract in its sales. Display revenue dropped. Search revenue dropped. Mobile and social took off while Yahoo! watched the train leave the station.

Morale plummeted. Talented Yahoo! employees went on to lead other great tech companies.

When you put this list of failures together, I feel fortunate that Yahoo! didn't give away its 40% Alibaba stake for a song. There were quite a number of investors and pundits who were banging the drum for Yahoo! to dump its holdings in Alibaba and Yahoo! Japan. "Yahoo!'s not a hedge fund," they argued, "so why continue to be in the investment business... they should just focus on their core business."

It's been the Alibaba investment that's primarily juiced the stock over the last 18 months. Even though it's a 24% stake and not a 40% stake, Yahoo! beggar investors can't be choosers.

At the time of publication the author was long YHOO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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